5 Reasons Why Small-Cap Stocks Can Surge in 2024: 5 Top Picks
In the first half of 2023, U.S. small-cap stocks showed decent trends but lagged the S&P 500 (up about 16%) and the Nasdaq Composite (up about 31.7%). The small-cap Russell 2000, an index tracking U.S. small-cap stocks, saw modest gains of around 7.2% during that period.
But Wall Street has seen a surge in small-cap stocks lately. This rally coincides with cooling inflation data and hopes of Fed rate cuts in 2024. Against this backdrop, Organogenesis ORGO, Riskified RSKD, Hooker Furniture Corporation HOFT, Stoneridge SRI and VirTra VTSI emerge as winning picks.
Below, we highlight a few reasons why small-cap stocks should soar higher in the coming days..
Decent U.S. GDP Growth
The U.S. economy expanded an annualized 4.9% in the third quarter of 2023, the maximum since the last quarter of 2021, above market forecasts of 4.3% and a 2.1% expansion in Q2, the advance estimate showed, per tradingeconomics. Consumer spending grew 4%, the most since Q4 of 2021, thanks to the consumption of housing and utilities, health care, financial services and insurance, food services and accommodations and nondurable goods (led by prescription drugs), recreational goods and vehicles.
A Dovish Fed Going Forward?
The latest datapoints indicate that inflation is on the decline. This may cause a less hawkish Fed in the near term. There is even a chance of a 75 bps rate cut in 2024.
Cheaper Valuation of Small Caps
Eric Green, CIO of Penn Capital Management, believes that the latest rally in small-caps has been long overdue, given the prolonged outperformance of large-cap stocks, as quoted on Yahoo Finance. Valuations for small-cap companies have become compressed relative to their larger counterparts, making them an attractive option for investors.
Small Caps: Key Beneficiary of Likely Fed Rate Cuts in 2024
Fundstrat's head of research, Tom Lee, also projects a small-cap rally in 2024, as quoted on Yahoo Finance. Lee indicated that small caps, which have more short-term debt than other companies, could benefit from the cost of capital coming down as the Fed is expected to cut rates in 2024.
M&A Activities to Pick up in Small-Cap Space?
Apart from reduced inflation, other factors are contributing to the rally in small-cap stocks. Per strategists, seasonality tends to benefit small caps toward the end of the year, making this an opportune time for their growth. Additionally, the valuation gap between large and small-cap companies, as well as private and public markets, suggests that merger and acquisition (M&A) activity may pick up. Companies may find it more attractive to acquire smaller, faster-growing firms, taking advantage of the valuation discrepancy.
Stock Picks
We highlight five stocks below that have a market capitalization less than $1 billion. These stocks have witnessed positive earnings estimate revisions for the upcoming quarter in the last 30 days. Each of our picks carries a Zacks Rank #1 (Strong Buy) or 2 (Buy) and has an has an upbeat VGM Score A or B.
Organogenesis (ORGO) is a leading regenerative medicine company focused on the development, manufacture and commercialization of solutions for the Advanced Wound Care and Surgical & Sports Medicine markets.
The stock has seen 500% positive earnings estimate revisions for the upcoming fiscal year in the last 30 days. It has a VGM Score of B. ORGO currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Riskified (RSKD) provides a fraud management platform, enabling frictionless eCommerce. The company's platform identifies the individual behind each online interaction, helping merchants eliminate risk and uncertainty from their business.
The stock has seen 175% positive earnings estimate revisions for the upcoming fiscal year in the last 30 days and has a VGM Score of B. RSKD has a Zacks Rank #2 at present.
Hooker Furniture Corporation (HOFT) is a leading manufacturer and importer of residential furniture, primarily targeted at the upper-medium price range. The company offers diversified products, consisting primarily of home office, entertainment centers, imported occasional, bedroom, and wall systems, across many style categories within this price range.
The Zacks Rank #1company has seen 77.30% positive earnings estimate revisions for the upcoming fiscal year in the last 30 days. HOFT has a VGM Score of A.
Stoneridge (SRI) is an independent designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, medium and heavy-duty trucks and agricultural vehicle markets.
TheZacks Rank #2 company has seen 50% positive earnings estimate revisions for the upcoming fiscal year in the last 30 days. SRI has a VGM Score of B.
VirTra (VTSI) develops, manufactures, markets and sells personal computer and non-personal computer-based products for training/simulation and advertising/promotion markets.
VTSI has seen 39.13% positive earnings estimate revisions for the upcoming fiscal in the last 30 days. Zacks Rank #1VTSI has a VGM Score of A.
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Stoneridge, Inc. (SRI) : Free Stock Analysis Report
Hooker Furnishings Corp. (HOFT) : Free Stock Analysis Report
VirTra, Inc. (VTSI) : Free Stock Analysis Report
Organogenesis (ORGO) : Free Stock Analysis Report
Riskified Ltd. (RSKD) : Free Stock Analysis Report
