We recently published a list of 7 Cheap Small-Cap Stocks To Buy Now. In this article, we are going to take a look at where Dropbox, Inc. (NASDAQ:DBX) stands against the other cheap small-cap stocks to buy now.
At the September Fed meeting, the Federal Open Market Committee (FOMC) decided to lower its policy interest rate by 50 basis points to support the economy. Chairman Jerome Powell stated that this move is aimed at maintaining labor market strength while reducing inflation.
He also noted that future rate adjustments will depend on incoming economic data. The Fed’s economic projections indicate a federal funds rate of 4.4% by year-end, with further rate cuts expected as inflation falls and unemployment edges up slightly.
The market seems quite happy with the current cut cycle and expects more to come. According to CME’s Fed-watch tool, the market is expecting another 25 to 50 bps cut at the November meeting. As of September 27, 53.3% interest rate traders expect a 50 bps cut while the rest are anticipating a 25 bps cut.
While the market had gotten used to the high rates and was still thriving, the lower fed funds rates have given a much-needed boost as the broader market reached new highs.
Fed Easing Cycle Boosts Optimism for Small Cap Stocks
Greg Tuorto, a portfolio manager at Goldman Sachs Asset Management, recently joined Catalysts on Yahoo Finance and discussed the outlook for small-cap stocks in light of recent Federal Reserve rate cuts and broader economic conditions.
He highlighted several supportive factors for small caps, including a stable U.S. economy and opportunities in sectors like technology, healthcare, and consumer industries. Despite recent underperformance, he believes small caps are positioned for a rebound, driven by strong earnings growth rather than multiple expansions.
Tuorto also emphasized the potential for small caps to outperform large caps in 2025, given that their earnings outlook appears more favorable. He sees the ongoing Fed easing cycle as a tailwind and suggests that businesses have adapted well to the higher rate environment and could benefit significantly from any further rate cuts. While Tuorto isn’t focused on the exact number of cuts, he sees the broader trajectory as a positive catalyst.
The portfolio manager is especially bullish on software stocks and noted that lower rates make this sector more attractive, and he expects more IPO activity in the space in the coming months. For the future, Greg Tuorto also believes that there will be another cut probably in the near future.7 Cheap Small-Cap Stocks To Buy
Our Methodology
For this article, we used the Finviz stock screener to identify nearly 150 small-cap stocks with positive forward price-to-earnings ratios. Our definition for small-cap stocks was stocks between $1 billion to $10 billion. Next, we narrowed our list to stocks whose earnings are expected to grow this year according to analysts, compared to the prior year, and have forward PE ratios below 15. Finally, we chose 7 stocks that were most widely held by institutional investors. The 7 cheap small-cap stocks to buy are listed in ascending order of their hedge fund sentiment, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Is Dropbox, Inc. (NASDAQ:DBX) A Cheap Small-Cap Stock To Buy Now?
Dropbox, Inc. (NASDAQ:DBX)
PE Ratio (FWD): 11.30
Number of Hedge Fund Holders: 41
Dropbox, Inc. (NASDAQ:DBX) is a California-based cloud storage service company. The platform provides users with a seamless solution for file hosting, synchronization, and sharing through a dedicated application that allows the creation of a special folder on their devices. The folder syncs with Dropbox’s cloud servers, which ensures that files remain updated across all linked devices.
The company has adopted a freemium business model, which allows users to access a basic level of service for free while offering paid subscriptions for additional features and storage capacity. The platform has expanded its offerings over the years and has integrated collaboration tools and acquired various companies to improve its functionalities.
It serves multiple industries including construction, media, technology, manufacturing, and education. Over the years, Dropbox (NASDAQ:DBX) has expanded its ecosystem by acquiring several companies to improve its services. Important acquisitions include Mailbox, an email app, and HelloSign, an e-signature platform, which have added useful features to the company’s main offerings.
On August 20, Reclaim.ai, a company that provides an AI-powered scheduling tool by the same name, announced that it has been acquired by Dropbox (NASDAQ:DBX). The acquisition will help the company improve its productivity offerings.
It will be able to provide users with a more streamlined way to manage their time and prioritize tasks effectively. Currently, Reclaim is used by over 320,000 people across more than 43,000 companies worldwide.
According to Insider Monkey’s database of 912 hedge funds, Dropbox (NASDAQ:DBX) shares were held by 41 hedge funds, valued at $481.008 million in the second quarter. With 10.3 million shares worth $231.76 million, Renaissance Technologies is the company’s most prominent shareholder, as of June 30. It is the 4th cheapest small-cap stock to buy now.
Overall, DBX ranks 4th on our list of cheap small-cap stocks to buy now. While we acknowledge the potential of DBX as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DBX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.