Market experts believe that the rally in the small-cap stocks might be just getting started.
Data suggested that the benchmark small-cap stock index, Russell 2000, saw an increase of more than 9% between early July and September end. This means that the small-cap index surpassed the S&P 500 index’s return of more than ~4%. The strong performance of the small-cap index primarily stemmed from the rotation into small-cap stocks in July as the investors believed that there would be rate cuts moving forward. These expectations finally materialized when the US Fed announced a mega 50-basis-point drop, with the projections of further cuts. As per Wall Street experts, the small-cap stocks saw a significant increase on the news.
Now that we are in the last quarter of the year, many investors wonder whether or not this rally is sustainable. However, market strategists believe that this rally has the potential to sustain, and 2025 will see strong outperformance.
Small-Caps in 2025: The Road Ahead
Why is a rate-cutting cycle beneficial for small-cap stocks? Smaller companies tend to be dependent more on floating-rate debt as compared to large-cap companies for their funding needs. Therefore, as and when the rates go down, the cost of debt will also be reduced, enabling small-cap companies to borrow more. Therefore, small businesses tend to benefit financially as their interest costs will decline. This should boost the earnings of small-cap companies.
Jill Carey Hall, who is the head of US small and mid-cap strategy at Bank of America, explained that the small-caps tend to outpace the returns delivered by the large-caps by approximately 1 percentage point. This happens over the 6 months post a 50-bps cut.
BlackRock believes that, if the market continues its upward trajectory, the small-cap space can demonstrate dynamism. Small-cap stocks are more sensitive to broader economic cycles, and history suggests that small caps benefit most during the expansionary cycles. The valuations for these firms and an environment of improved EPS growth should result in delivering competitive returns, as per the firm. These favorable characteristics, together with the US economic gains, and the infrastructure investment should help accelerate earnings for the smaller firms.
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What Should Investors Expect from Small Cap Stocks?
As per Francis Gannon, Co-Chief Investment Officer and Managing Director of Royce Investment Partners, small-caps have an advantage over large-caps concerning estimated earnings growth for 2025. Moreover, he believes that small-caps had better returns than large-caps following the previous 10 presidential elections. This was the case irrespective of the fact that which party won the White House. Such an outcome was seen despite every election having its own set of challenges, difficulties, and opportunities. Therefore, he believes that it’s not about the person or policies as much as the investors pay attention to the uncertainty that prevails in the months before any elections.
As per Gannon, inflation has been moderating, the economy continues to grow, unemployment remains low, and there has been normalization in the rates. Also, the benefits of reshoring and the CHIPS Act are now visible. Additionally, he believes that there has been a positive reversion to the mean argument for the small-cap leadership as well as strong performance.
Our Methodology
To list 10 Oversold Small Cap Stocks to Buy Right Now, we used a Finviz screener to extract the stocks having the market cap of less than $2 billion. After getting the list of 20-25 stocks, we narrowed it down to the following 10 stocks by selecting the ones trading at a forward P/E of less than 15.0x and which have fallen significantly on a YTD basis. Finally, the stocks were ranked in the 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).
An engineer in her office examining a blueprint, surrounded by engineering components.
Ingevity Corporation (NYSE:NGVT)
Market Cap (As of October 23): $1.14 billion
Forward P/E (As of October 23): 9.97x
% Decline on a YTD Basis: ~32%
Number of Hedge Fund Holders: 17
Ingevity Corporation (NYSE:NGVT) is engaged in manufacturing and selling activated carbon products, derivative specialty chemicals, and engineered polymers in North America, and other countries.
Ingevity Corporation (NYSE:NGVT) has been implementing a repositioning strategy for its Performance Chemicals segment and anticipates leverage to decline by the end of the year. The company has plans to reduce costs by relocating oil refining operations to North Charleston and closing the Crossett site. Ingevity Corporation (NYSE:NGVT) is expecting that The Performance Chemicals segment should return to profitability in 2025. The company expects to realize net savings related to the closure of its Crossett facility of ~$20 million – $25 million per year starting in 2025.
Wall Street analysts believe that its revenue environment for the materials business should remain strong. Ingevity Corporation (NYSE:NGVT) continues to focus on generating cash and reducing debt. Notably, the restructuring efforts and optimization of its operational footprint are expected to contribute to the recovery of the Performance Chemicals segment starting next year.
The Performance Materials division of Ingevity Corporation (NYSE:NGVT) is expected to see improvement over the coming years. This forecast comes off the back of the expectation of increased demand for hybrid vehicles, which should fuel the need for activated carbon products. This demand is anticipated to increase through 2026. Analysts believe that Ingevity Corporation (NYSE:NGVT)’s targeted actions are expected to lay the groundwork for growth over the upcoming years. The company aims that corporate and business-related cost reduction actions should yield ~$10 million in annual savings starting in 2025.
Analysts at CJS Securities upgraded shares of Ingevity Corporation (NYSE:NGVT) from a “Market perform” rating to an “Outperform” rating, setting a $58.00 target price on 7th August.
Overall, NGVT ranks 9th on our list of oversold small cap stocks to buy right now. While we acknowledge the potential of NGVT as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than NGVT 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.