We recently published a list of 7 Best Nano Cap Stocks To Invest In. In this article, we are going to take a look at where Potbelly Corporation (NASDAQ:PBPB) stands against other best nano cap stocks to invest in.
What Are the Small Cap Bulls Saying?
In one of our recent articles about 8 Most Undervalued Penny Stocks To Buy According To Analysts, we talked about how many analysts are expecting small caps to perform well in a slowing economy. Here’s an excerpt from the article:
“To talk about what the stock market looks like today and in the near future. Tom Lee, co-founder of Fundstrat Global Advisors joined CNBC in a recent interview. He has been one of the strong proponents and supporters of small-cap stocks. Lee says that we are in a volatile environment currently, due to a few reasons, one being the elections in less than 30 days, the second being the Middle Eastern crisis which is scaring investors, and lastly the port strike that has the potential to cripple the economy. However, he still expressed his optimism that the year-end has a lot of tailwinds and investors shouldn’t be afraid to buy the dip. Moreover, Lee also highlighted that these current events are all short-term headwinds in a buying cycle and are expected to die down quickly.
Lee thinks that bottoms are tough and processed, and small caps are in the process of what could be a multi-year bottom. Therefore the conviction is that some people might want to buy the big names on NASDAQ and the AI market, however, with small caps trading at lower multiples of P/E less than 10, the risk and reward lie in small caps. Lee further mentioned that interest rate cuts and better earnings growth make the path for small-cap growth more visible.”
A few weeks ago, Richard Bernstein, Richard Bernstein Advisors CEO, joined CNBC for an interview to discuss the future of small caps. He mentioned that the reason why he is bullish on mid-caps and small-caps is because he sees earnings growth to be within these segments of the market. The forecasts are showing that small caps are going to grow at a multiple similar to the Magnificent Seven.
Bernstein explained that this is not unusual. When profit cycles take a dip companies have greater sensitivity to upturn and profitability. He mentioned that what’s extraordinary is that the Fed is easing into this accelerating environment, whereas normally, they would be tightening the policy rate. As the profits are expected to go up, the economy is naturally expected to follow, thereby supporting small-cap stocks. On top of that, the interest rates easing adds more fuel for the markets to rally.
Bernstein acknowledged that many investment managers are betting high stakes on the mega-cap stocks. He mentioned that if you are a momentum investor it makes sense to put all your stakes in the Magnificent Seven because that’s where the momentum is currently. However, if you are a fundamental investor it might not make total sense to invest in mega-cap stocks as they are on a slower growth trajectory with expensive prices. Whereas other parts of the market are cheaper and faster growing. Bernstein mentioned, historically speaking, a combination of cheaper and faster-growing stocks, which is how fundamental investors think is a good combination and a viable investment strategy.
Lastly, Bernstein showed his concern regarding speculative behavior, particularly in cryptocurrencies, which may signal potential risks for the economy. Bernstein warned that excessive financial asset inflation can be as damaging as inflation in real assets, leading to misallocation of capital within the economy. For context, asset inflation is what analysts normally refer to as bull markets, meaning that if bull markets continue to persist for an excessive period they create a bubble which leads to speculation and misallocation of cash.
Our Methodology
To compile the list of the 7 best nano cap stocks to invest in, we used the Finviz stock screener. We define nano-cap stocks to be those with a market capitalization of $50 million to $250 million. Therefore, we used the screener to find stocks that fit our criteria and then arranged them by market capitalization. Lastly, we ranked these stocks as per the number of hedge fund holders in Q2 2024 according to Insider Monkey’s database. Please note that the market caps were recorded on October 15, 2024. The list is ranked in ascending order of the number of hedge fund holders.
Why do we care about what hedge funds do? 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).
A chef in a busy kitchen, adding the finishing touches to a signature sandwich.
Potbelly Corporation (NASDAQ:PBPB)
Market Cap: $245.25 Million
Number of Hedge Funds: 16
Potbelly Corporation (NASDAQ:PBPB) is a fast-casual restaurant chain primarily known for its Potbelly Sandwich Shops across the United States. The company operates a series of sandwich shops offering their signature sandwiches along with various salads, soups, and other sides.
They have around 424 shops in 31 states and the District of Columbia, with a mix of company-owned and franchise locations. Potbelly Corporation (NASDAQ:PBPB) is focused on growing its network of franchises and is also innovating its shops to make them smaller to reduce expenses.
During the second quarter of 2024, it announced adding 22 new franchises and 9 new shop openings. The overall revenue for the company came in at $119.7 million, which was down 5.5% year-over-year due to last year’s refranchising efforts. However, on the bright side, the franchising efforts are paying off well for the company as the franchise revenue surged by 117% to $4.2 million, driven by a 53% increase in franchise units. Moreover, the Average Weekly Sales (AWS) was also up 0.6% year-over-year indicating that each store is showing considerable improvement.
Looking ahead, Potbelly Corporation (NASDAQ:PBPB) aims to open at least 30 new shops during the rest of the year and achieve adjusted EBITDA of $27 million to $30 million.
Next Century Growth Investors Micro-Cap Strategy stated the following regarding Potbelly Corporation (NASDAQ:PBPB) in its first quarter 2024 investor letter:
“Potbelly Corporation (NASDAQ:PBPB) is a fast casual sandwich shop with 430 stores in the US. The company has been around for nearly 50 years and has been public since 2013. The growth story was challenged for many years after going public. However, the company hired a new management team which has improved all facets of existing store operations and they are now getting back into store growth mode. Currently around 70 of the 430 stores are franchises and this will be the primary focus of store growth in the future. The company believes they can have >2,000 stores in the US with about 85% of stores under the franchise model.”
Overall, PBPB ranks 6th on our list of best nano cap stocks to invest in. While we acknowledge the potential of PBPB to grow, 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 a promising AI stock 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.