Small-Cap Stocks are Expected to Offer Higher Returns in 2025
Small-cap stocks are offering a myriad of opportunities to investors and are expected to go higher. On September 25, Greg Tuorto, Goldman Sachs asset management portfolio manager, appeared in an interview on Yahoo Finance to discuss his thesis on small-cap stocks.
There have been several tailwinds for small-cap stocks, which may have been ignored previously. However, now that the economy is stabilizing, investors may find a variety of undervalued names in the healthcare and technology sectors especially.
Tuorto further added that small-cap stocks have been underperforming for three years, however, in 2024, there is a lot of pent-up opportunity in this area. A year from now, small-cap stocks are expected to deliver unprecedented returns as the economy continues to grow. He expects more IPOs and mergers and acquisitions to come through before 2024 comes to a close.
“Prial noted that small caps have been outperforming in the third quarter, largely driven by expectations of rate cuts, with a 50 basis point reduction being more significant than previously anticipated. She expressed optimism that small caps have substantial room to grow, emphasizing that this could mark the beginning of a multi-year cycle for these stocks. Currently, small-cap stocks are underrepresented in the market, comprising just under 5% of the total equity market, which is at record lows. This low ownership level presents an attractive opportunity for investors.
Biotechs Set to Raise Millions in IPOs
The biotechnology sector is growing rapidly and a large number of startups are expected to go public. On October 7, Reuters reported that three startups are set to raise $400 million in their initial public offerings, amid the sector’s second IPO boom. In September, several drug developers made their market debuts, raising more than $900 million in their IPOs, encouraging other startups to follow suit.
While there is uncertainty around the presidential elections in the United States, biotechnology startups and companies are benefiting from the declining rate cuts. Experts polled by Reuters suggest that biotech companies are of the view that they should exploit the current market momentum rather than wait for presidential elections to normalize the market. However, this also puts immense pressure on other biotech companies to go public as soon as possible.
Our Methodology
To find the most promising small-cap stocks according to hedge funds, we used the Finviz stock screener. We set the market capitalization filter to range between $300 million and $2 billion. We then examined the hedge fund sentiment of these stocks as of Q2 2024 and picked the most popular ones. The stocks are sorted in ascending order of the number of hedge fund holders 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 Vestis Corporation (VSTS) a Top Small-Cap Stock Pick by Hedge Funds?
Closeup portrait of a surgeon wearing a surgical mask and gown while holding a surgical device.
Market Capitalization as of October 10, 2024: $1.97 Billion
CONMED Corporation (NYSE:CNMD) is a manufacturer of medical equipment and general surgical tools. Some of its products include fixation devices, dilators, electrosurgical units, hemostasis, biomedical sensors, and specimen bags, to name a few.
The company has a history of introducing breakthrough technologies to the medical industry. Some of them include the AirSeal iFS, the only insufflator proven to enhance medical procedures, the Autoclavable Camera Head, the first of its kind, and the Hall Lithium Batteries, the first fully autoclavable battery. CONMED Corporation (NYSE:CNMD) is also known for its impactful partnerships and acquisitions that have led to what the company is today.
CONMED’s (NYSE:CNMD) commitment to innovation is what contributes to its position on our ranking as one of the most promising small-cap stocks. The company expects full fiscal year 2024 revenue to range between $1.305 billion to $1.315 billion and research and development expenses to increase by 4% to 5%.
CONMED Corporation (NYSE:CNMD) is striving to meet the unmet needs of healthcare customers, which is also an avenue for increased market share. In addition to that, the company is also working to expand its portfolio and step into high-growth and high-value markets. All these strategic initiatives combined promise strong financial growth and increased market share.
Overall, CNMD ranks 10th on our list of most promising small-cap stocks according to hedge funds. While we acknowledge the potential of CNMD 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 time frame. If you are looking for an AI stock that is more promising than CNMD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
