Twelve Great Small Cap Stocks for 2024
Forbes surveyed John Rogers and five other veteran small-cap investors for their top recommendations for 2024.
The stock market came back strong in 2023, with the S&P 500 index closing the year near its record level since early 2022, but many individual stocks have been left out of the rally. The seven largest stocks in the S&P 500 were responsible for the bulk of the index’s 25% gain, while results were more mixed for the other 493 large companies in the index , as well as small- and mid-cap stocks.
The Russell 2000 small-cap index finished the year strong over the past two months by posting a 15% gain , although it still sits 16% below its November 2021 peak. Small-cap investors are still excited with the fact that small caps are a bargain due to the large valuation differences of the market leaders. They anticipate a rotation toward their corner of the market next year.
“It’s been a real surprise that large-cap growth stocks have come back so strongly ,” says John Rogers, founder of Ariel Investments and a longtime acolyte of small-cap value. “I still think that every time people start buying stocks just because they are an important part of an index, it is a sign that it is peaking, so I am not optimistic about the Magnificent Seven for 2024. The threats Competitive opportunities will come from places you can never imagine .
To get insights outside of the companies grabbing all the headlines in 2023, Forbes surveyed Rogers and five other veteran small-cap investors for their top recommendations for 2024. Here are 12 stocks that stood out.
John Rogers
Founder, Co-CEO and CIO of Ariel Investments
Madison Square Garden Entertainment (MSGE)
Market capitalization: $1.5 billion
Trailing 12-month revenue: $851 million
Rogers’ Ariel Investments is the longtime owner of Madison Square Garden Entertainment and is still enamored with the stock’s potential. «It’s very difficult to replicate or build a competitive stadium in New York City, one of the largest cities in the world,» he says. In addition to the Garden, the company also has a long-term lease on Radio City Music Hall and owns the Christmas Spectacular brand, which draws crowds of people to Midtown each December to see the famous Rockettes. “These are companies that are going to prosper from generation to generation , ” adds Rogers. In April, MSGE spun off Sphere Entertainment Co. (SPHR), which owns and operates the futuristic new Sphere in Las Vegas, a stock Rogers also loves and which is up 65% this year, while MSGE has remained stable since the split.
Leslie’s (LESL)
Market capitalization: $1.3 billion
Trailing 12-month revenue: $1.5 billion
It’s been a rough three years for pool supply retailer Leslie’s since its October 2020 initial public offering, with shares falling 59% from its IPO price of $17 per share, but that’s often the case. stock that catches Rogers’ attention. «We like to buy stocks when there’s a cloud over them that people aren’t excited about ,» says the tried and true value investor. Leslie’s is the largest seller of pool chemicals and supplies in the U.S. and is expanding to partner more with professional pool service providers. Its revenue in the spring and summer quarters decreased 9% compared to last year; Rogers says one factor was a cooler summer in California, which caused people to spend less time in their pools and the chemicals to age at a slower rate. Rogers is optimistic that its plans to pay down debt and a new CFO to help rein in costs will lead to a turnaround for the stock.
Kenneth Farsalas
Portfolio Manager, Oberweis Micro-Cap Growth and Oberweis Small-Cap Opportunities
Axcelis Technologies (ACLS)
Market capitalization: $4.4 billion
Trailing 12-month revenue: $1.1 billion
Farsalas has owned Axcelis for several years as the stock grew from a microcap company to one of the largest companies in the Russell 2000 index, and he still sees catalysts on the horizon to propel it further. Axcelis specializes in ion implantation in semiconductors, a process that is more important and intensive for manufacturing silicon carbide semiconductors that are integral to electric vehicles because they conduct electricity more efficiently than standard semis. Axcelis is “by far the dominant player with the best product ,” Farsalas says, commanding 70% to 80% of the ion implant market for silicon carbide and higher power applications. They have an order book of around $1.2 billion, about a year’s worth of revenue, and are already taking orders through 2025, and Farsalas believes a rebound in the semiconductor memory market will boost their results. He expects earnings to approach $12 per share in 2025, compared to $7 per share today. “You can buy this business for just over 10 times the earnings power we expect in 2025, so we think it’s a growth company that actually represents a really compelling value right now ,” Farsalas says.
SkyWest (SKYW)
Market capitalization: $2.1 billion
Trailing 12-month revenue: $2.9 billion
One stock Farsalas bought this year after an improvement in second-quarter earnings was SkyWest , a private-label airline that flies regional routes for United, American, Delta and Alaska Airlines . It bought back about $250 million in stock in 2023 and has an “exceptional balance sheet for an airline ,” Farsalas says, with $820 million in cash and just over $3 billion in debt. The pilot shortage in recent years has been a hurdle as baby boomers retired and many left the workforce during the pandemic, but that problem is improving, particularly at a small airline that is more accessible to new pilots. “As pilot availability improves, they actually have unused aircraft that they can put back into service to add 15% capacity to their flight routes without purchasing a single aircraft ,” says Farsalas. Another differentiator between SkyWest and the major airlines is that SkyWest passes fuel costs on to the major airlines. While it earned around 50 cents per share in 2023, analysts expect it to rise significantly to $5.64 per share in 2023, and Farsalas believes it can reach $8 per share in 2025. The stock more than tripled in 2023 in anticipation of strong results, although it is still trading below its pre-pandemic highs.
Amy Zhang
Portfolio Manager, Alger Small Cap Focus and Alger Small Cap Growth
PROS Holdings (PRO)
Market capitalization: $1.8 billion
Trailing 12-month revenue: $297 million
PROS Holdings is a cloud-based software company that provides pricing optimization and revenue management services to other companies, primarily airlines, and is now expanding its predictive AI and machine learning capabilities to other industries. “The secret sauce is their algorithms ,” says Zhang. It is the market leader in dynamic pricing software and helps businesses forecast demand and set prices accordingly. The pandemic crushed stocks as air travel virtually shut down, shares fell nearly 60% in the first quarter of 2020 and remained flat in 2021 and 2022, but revenue growth resumed at a 10% pace in 2023 , which helped the stock rally 64%. Zhang says the Houston-based company reached an inflection point by becoming free cash flow positive this year and sees continued margin expansion over the next three to five years as it penetrates verticals such as manufacturing , energy and food.
Natera (NTRA)
Market capitalization: $7.3 billion
Trailing 12-month revenue: $989 million
Alger is also the longtime owner of Natera, an Austin, Texas-based genetic testing company that was founded in 2004. Its initial core business was reproductive health and non-invasive prenatal testing, but it has since expanded to testing and monitoring for cancer recurrence. with its Signatera product , which Zhang calls its “most important growth driver” for the next 5 to 10 years. The third branch of it performs diagnostic tests for organ transplants. “They have built a moat and are gaining market share in all three markets ,” says Zhang. “We always say that we invest in companies that save lives, time, money or headaches, but after Covid, nothing is more important than saving lives . ” His revenue is growing 27% year-over-year, and Zhang expects certain clinical guidelines to be revised next year, which will be a big help to his revenue and gross profit.
James Davolos
Portfolio Manager, Horizon Kinetics
Osisko Gold Royalties (OR)
Market capitalization: $2.7 billion
Trailing 12-month revenue: $184 million
To prepare for a year of expected interest rate cuts and lower yields, Davolos recommends some exposure to gold and believes royalty companies with reliable revenue streams are a safer bet than buying miners outright. While large-cap royalty and streaming stocks Franco-Nevada and Wheaton Precious Metals trade at premiums of more than double NAV, Montreal-based Osisko is cheaper for investors, even at its NAV. Its crown jewel is a 5% net royalty on the Canadian Malartic smelter , Canada’s second-largest gold mine, and it streamlined its business after a management restructuring by selling its $100 million equity into another miner. of Osisko Mining gold , encouraging investors who are more interested in royalty-only stocks. Shares rose 12% in the week after the deal. “This is a high-quality royalty business where the base case returns are strong even without gold price appreciation, but there is a non-linear relationship where returns can increase substantially if we see gold appreciate in value in this.” “type of macro regime ,” says Dávolos.
OTC Markets Group (OTCM)
Market capitalization: $663 million
Trailing 12-month revenue: $101 million
OTC Markets Group operates markets to trade 12,000 US and international stocks that are not listed on major exchanges such as the New York Stock Exchange or Nasdaq , and its sales and profits are growing steadily with high margins thanks to high trading volumes, trading fees. quote and data rates. Even as total stock listings are declining around the world and the past two years have been lean for large IPOs, small companies still trade on over-the-counter markets, attracted by looser reporting requirements and lower expenses. Owning a stock is also a useful hedge against volatility, which results from high trading volumes and helps stocks like OTCM. “Obviously the global financial crisis was terrible for stock prices, but stocks were making record profits; “The same thing happened during the first and second quarters of 2020 ,” says Davolos. «To the extent that we enter a regime of greater volatility, the stock markets will print money . » OTCM has remained largely flat over the past two years following a 74% gain in 2021.
Nicholas Galluccio
Portfolio Manager, Teton Westwood Small Cap Equity Fund
Openlane (KAR)
Market capitalization: $1.6 billion
Trailing 12-month revenue: $1.6 billion
Openlane is a digital marketplace for the sale and auction of used cars that Galluccio loves, especially since it sold its physical locations to Carvana for $2.2 billion in May 2022, more than the market cap of the entire company. . “It was the biggest sale in history ,” says Galluccio. «They paid their debts, so now they are almost debt-free . » Used car prices skyrocketed during Covid, but are now falling, prompting dealers to sell some used cars through auctions and giving more volume to Openlane, Galluccio says. Its sales this year are growing and it currently trades at 7.7 times 2024 EBITDA expectations, a bargain for value investors. Shares gained 15% in 2023, and Galluccio’s upside price target is $25 per share, up 65% from its current level of around $15, with less downside risk due to its clean balance sheet.
Cohu (COHU)
Market capitalization: $1.7 billion
Trailing 12-month revenue: $690 million
Sales are down 15% over the past 12 months for this tech stock that makes semiconductor wafer handling equipment, inspecting wafers for customers like top chipmakers Intel , Applied Materials , Texas Instruments and more. Galluccio says the drop in business is due to a build-up of inventory during Covid when customers in the supply chain became overstocked, but the company expects a turnaround starting next year. “We may be a couple of quarters away from the tipping point where supply and demand in this destocking come back into balance, maybe a quarter away, but the recovery will be quick,” Galluccio says. Its enterprise value to EBITDA multiple is about 12x, but if EBITDA recovers to where it thinks it will in 2024 and 2025, that figure would be 7x cheaper. Its end market in the cell phone business is improving, but Galluccio says auto and industrial are still weak and he expects the stock to rise when Cohu’s top-line numbers start to improve next year.
Bryan Wong
Portfolio Manager, Osterweis Emerging Opportunity Fund
DoubleVerify Holdings (DV)
Market capitalization: $6.2 billion
Trailing 12-month revenue: $533 million
Wong ‘s $194 million small-cap fund has generated annualized returns of 10.7% over the past 10 years, outperforming the Russell 2000 Growth Index by four percentage points, and more than a third of his portfolio is in stocks technological. One of them is DoubleVerify , a software company that acts as a “safety belt for digital advertisers ,” she says. He receives an analytics fee based on ad volume that measures his analytics to ensure companies aren’t wasting money buying blocked or fraudulent ads and are presented in places that preserve their brand. For example , IBM suspended advertising on Its sales are up 26% in the past 12 months, it is consistently profitable and Wong says it has plenty of room to grow in social media ads, which account for just 16% of its revenue but 60% of all digital advertising spend. currently.
Clearwater Analytics (CWAN)
Market capitalization: $4.1 billion
Trailing 12-month revenue: $352 million
Headquartered in Boise , Idaho, Clearwater Analytics is a cloud software company that offers automated accounting and compliance services for institutional investors. “They have the best technology in the industry, similar to DoubleVerify, which primarily replaces legacy software ,” says Wong. It went public in 2021 and rose 41% on its first day of trading, but, like many software companies that have just gone public, it has struggled since then and is now trading 21% lower than its initial close. Wong says its original business model tied to a percentage of clients’ assets under management came with unwanted volatility due to last year’s swings, particularly in the fixed income market, which accounts for the majority of the 6, 4 trillion dollars in assets covered by its platform. In 2022, Clearwater began transitioning to what it calls a “base plus” model, charging customers a base fee that can increase annually plus incremental fees for increases in assets and ancillary services, limiting its downside in sales. This change has helped its trailing 12-month revenue grow 21% through September 2023.
