Small cap stocks, defined as those with a market capitalization between $300 million to $2 billion, can be a lucrative but higher-risk area of the stock market. The potential reward comes from the greater growth opportunities in smaller companies. However, with less financial strength, small caps carry more risk if business fundamentals deteriorate.
As we head into 2024, some small cap stocks are well positioned in growing markets and could deliver outsized returns. But prudent stock picking is essential to avoid potential pitfalls. This article explores 10 small cap stocks across various sectors that exhibit strong potential for gains in 2024 and beyond.
What to Look for in Small Cap Stocks
Here are key factors to evaluate when analyzing small cap stocks:
Market Opportunity – The company should operate in a large and expanding market to support rapid growth. Assessing the total addressable market helps gauge the revenue potential.
Competitive Position – The company should have some competitive edge through proprietary technology, strong branding, distribution advantages, or other strategic assets that prevent easy duplication from rivals.
Management Team – Experienced leadership that has successfully steered business growth is vital. Their vision, execution capabilities, and track record give them confidence.
Financial Health – While small caps can run losses in growth phases, they should have adequate cash reserves and capital to fund expansions. Revenue and earnings growth signal commercial success.
Growth Catalysts – New products, service offerings, market expansions, and partnerships can drive the next growth leg. These initiatives build on competitive strengths.
Valuation – Growth potential warrants higher valuations, but multiples should be reasonable relative to projected earnings. Beware chasing overhyped stocks with no substance.
These criteria help identify small caps capable of generating multi-bagger returns while avoiding unfounded speculation. Here are 10 stocks that make the grade in 2024.
1. ShockWave Medical (SWAV)
- Sector: Healthcare
- Market Cap: $6.3 billion
- 1 Year Return: 17.3%
ShockWave Medical is a medical device company focused on developing intravascular lithotripsy technology for treating problematic calcium deposits in blood vessels. Its differentiated lithotripsy devices use sonic pressure waves to break up calcified lesions with minimal trauma compared to traditional invasive treatments.
The company currently targets two large addressable markets:
- Coronary artery disease – $6 billion global opportunity
- Peripheral artery disease – $5 billion global opportunity
ShockWave Medical has strong clinical data demonstrating superior safety and efficacy over competitors. This supports rapid adoption by physicians. Revenue has grown at a 58% CAGR over the past three years as more medical facilities utilize its devices.
With a strong balance sheet and partnerships with leading catheter manufacturers, ShockWave Medical is positioned to continue gaining share in multibillion-dollar vascular calcium treatment markets.
2. Blueprint Medicines (BPMC)
- Sector: Healthcare
- Market Cap: $4.7 billion
- 1 Year Return: 45.6%
Blueprint Medicines develops targeted therapies for genomically defined cancers and rare diseases. It currently has three approved drugs:
- Ayvakit – targeting gastrointestinal stromal tumors
- Gavreto – targeting non-small cell lung cancer
- Turalio – targeting plexiform neurofibromas
Its pipeline includes 6 other candidates targeting various cancers including breast, colorectal and lung cancer.
Blueprint Medicines combines advanced genomics screening with specialized drug discovery capabilities to develop highly selective therapies. This precision medicine approach allows attacking specific mutations driving cancer.
With strong drug development expertise and $1.6 billion in cash, Blueprint Medicines is well-funded to progress its deep pipeline. Its existing drug sales also give stable revenues until additional approvals further boost growth.
3. Paycor HCM (PYCR)
- Sector: Technology
- Market Cap: $4.3 billion
- 1 Year Return: -19.4%
Paycor provides cloud-based human capital management (HCM) software targeted at small and medium-sized businesses. Its unified platform streamlines payroll, time tracking, HR management, benefits administration and talent management.
The company serves over 29,000 clients through an efficient sales model utilizing channel partnerships with retirement brokers, banks and insurance carriers. This distribution network allows efficiently reaching SMBs.
Paycor’s annual recurring revenue has grown at a 29% CAGR since 2018. Operating losses have narrowed in the past two years placing the company on a path to profitability.
With less than 5% market share currently, Paycor is well positioned to gain share in the $30 billion SMB HCM software industry. Its partnerships and efficient customer acquisition provide expansion tailwinds.
4. PROG Holdings (PRG)
- Sector: Consumer Discretionary
- Market Cap: $2.0 billion
- 1 Year Return: -29.0%
PROG Holdings operates two complementary businesses:
- Progressive Leasing – Leases furniture, appliances, electronics, jewelry and other products to underserved consumers through partnerships with over 20,000 retail locations.
- Vive Financial – Provides a variety of lending products including auto loans, retail credit, and buy now pay later solutions.
Progressive Leasing has relationships with major national retailers including Best Buy, Lowe’s and Ashley Furniture allowing offering leases seamlessly at point-of-sale. Over 2 million consumers are repeat Progressive Leasing customers.
Vive Financial utilizes advanced underwriting algorithms to serve non-prime borrowers profitably while keeping loss rates modest.
While economic weakness pressured PROG’s stock in 2022, its business model is defensive with 75% EBITDA margins and low leverage. Strong cash flows support an attractive dividend above 2%. As macro conditions improve, PROG offers rebound potential.
5. InMode (INMD)
- Sector: Healthcare
- Market Cap: $2.6 billion
- 1 Year Return: -46.6%
InMode develops minimally invasive aesthetic medical products utilizing its proprietary radiofrequency technology. Its devices enable aesthetic treatments including:
- Body contouring – reducing fat through lipolysis
- Skin tightening – collagen remodeling and tightening
- Face contouring – facelift and wrinkle reduction
Over 600,000 InMode procedures were performed in 2021, up 55% year-over-year. Its clinical data shows high efficacy with minimal downtime and pain.
InMode is generating over 30% operating margins with minimal debt. New product launches expanding its addressable market coupled with international expansion provide growth runways.
Despite the stock falling on macro worries, InMode is well positioned to capitalize on strong demand for aesthetic medicine. Its differentiated technology and profitable business model set up future upside.
6. Ontrak (OTRK)
- Sector: Healthcare
- Market Cap: $1.4 billion
- 1 Year Return: -24.4%
Ontrak is a technology-enabled healthcare company focused on managing chronic disease through virtualized outpatient care. Its Ontrak platform combines connected health devices, personalized interventions, and AI-powered analytics.
Ontrak’s current focus is behavioral health conditions, including anxiety, depression, and substance abuse, which impact 164 million Americans. Its personalized telehealth model delivers better patient engagement and outcomes compared to traditional treatment.
The company partners with health plans and employers to improve member health, which also lowers medical costs downstream. These partnerships, plus geographic expansion, provide growth runways.
Despite revenue declines in 2022, a new contract positions Ontrak for a rebound. Its virtual care model aligns with shifting healthcare dynamics, while partnerships anchor growth.
7. View (VIEW)
- Sector: Industrials
- Market Cap: $1.3 billion
- 1 Year Return: -71.5%
View manufactures smart glass used in buildings to control natural light, glare, temperature, and privacy. Its patented electrochromic glass technology enables dynamic modulation of tint.
View Smart Glass installations already cover 130 million square feet of real estate, including corporate offices, healthcare facilities, airports, and educational institutions.
Currently, less than 1% of buildings utilize smart glass, offering View exponential growth potential as adoption increases. View partners with major glass fabricators like Saint-Gobain for efficient scaling.
Despite production delays that caused its stock to plummet, View’s growth opportunity remains massive. Its partnerships, backlog exceeding $1 billion, and improved execution pave the runway for this innovative company.
8. Tenon Medical (TNON)
- Sector: Healthcare
- Market Cap: $1.1 billion
- 1 Year Return: N/A (IPO in 2022)
Tenon Medical is focused on developing surgical robots for ambulatory care settings and microsurgeries. Its compact and flexible robots aim to make robotic procedures more accessible and affordable.
The company’s technology platform combines advanced visualization, precision robotics, and intelligent surgical assistance. It recently received FDA clearance for its Teno system for cranial neurosurgery procedures.
Tenon Medical believes its disruptive technology can ultimately address over 8 million annual procedures spanning neurosurgery, otolaryngology, ophthalmology, and orthopedic surgeries. Tapping into this large opportunity provides immense upside.
As a newly public company, Tenon lacks a long financial track record. However, with a strong balance sheet, an experienced team, and innovative surgical robotics, Tenon Medical holds promise if it can deliver on its vision.
9. Replimune Group (REPL)
- Sector: Healthcare
- Market Cap: $1.2 billion
- 1 Year Return: 9.3%
Replimune Group is a clinical stage biotech company developing oncolytic immunotherapies from its proprietary RP1 platform. RP1 is based on a strain of the herpes simplex virus engineered to potently replicate in tumors and spark anti-cancer immune responses.
Replimune’s RP1 is currently in Phase 2 testing against four solid tumor types, including melanoma and non-melanoma skin cancers. It has demonstrated strong response rates in the difficult-to-treat cutaneous squamous cell carcinoma.
The company is also combining RP1 with Opdivo, an approved PD-1 inhibitor, to evaluate synergistic benefits. This provides additional shots on goal, and combinations differentiate the platform.
With over $430 million in cash, Replimune has a solid runway to clinically advance RP1. Its pipeline, collaborations, and promising data provide upside potential.
10. Terns Pharmaceuticals (TERN)
- Sector: Healthcare
- Market Cap: $564 million
- 1 Year Return: 104.8%
Terns Pharmaceuticals focuses on developing single-agent and combination therapies for treating non-alcoholic steatohepatitis (NASH) and other chronic liver diseases.
Its lead candidate is TERN-101, a liver-distributed farnesoid X receptor (FXR) agonist with best-in-class potential. TERN-101 recently reported positive 12-week data from a Phase 2a NASH trial, showing significant improvements in key liver disease markers.
Terns also has partnerships with Novartis and Eli Lilly to test its NASH therapies in combination with GLP-1 analogs, which target different mechanisms of action.
With a large underserved NASH treatment market and encouraging clinical data, Terns Pharmaceuticals has breakout potential. Its capital efficient operating structure provides funding advantages as a small cap.
Key Factors to Assess Future Growth Potential
In summary, small cap stocks with huge growth potential often share common traits:
- Strong market opportunity – The company’s products/services align with high-growth industry trends. Large, underpenetrated markets provide a long runway.
- Competitive edge – Proprietary technology, protected IP, distribution scale, or brand reputation provide moats against rivals.
- Clear growth strategy – Management defines coherent expansion initiatives leveraging competitive strengths into new products/services, geographies, and customer segments.
- Healthy financials – Revenue and earnings indicate commercial traction for growth investments. Solid cash reserves and cash flow fund expansion.
- Catalysts in place – New products ready for launch, partnership announcements, regulatory approvals, and other events that can unlock value.
- Reasonable valuation – Accounting for higher risk in small caps, the valuation should reflect growth prospects without becoming overextended.
Performing due diligence across these factors can help identify small cap stocks capable of generating huge returns through smart and steady growth execution.
Assessing Risks in Small Cap Stocks
While small caps present tantalizing growth potential, higher risks are inherent that warrant defensive portfolio management:
- Financial fragility – Smaller cash reserves and reliance on external financing make them vulnerable to downturns.
- Low liquidity – Thin trading volumes can lead to volatile price swings.
- Key person risk – Heavily dependent on founder or CEO vision and competence.
- Product concentration – Reliance on a single high-growth product creates risk if it falters.
- Legal/Regulatory – Greater risk of litigation from patent disputes, product liabilities, or regulatory actions.
- Binary outcomes – Higher chance of failure but also greater upside if successful.
To balance the risks, small cap positions should be limited to only a fraction of a diversified portfolio. Utilizing stop losses and maintaining upside/downside price targets based on company fundamentals promotes taking profits and cutting losses when investment portfolios break.
Researching and Selecting Small Cap Stocks
Some tips for researching and selecting small cap stocks:
- Leverage screening tools to identify stocks that meet growth, valuation, and financial criteria. Resources like Finviz and TradeView provide filters.
- Check analyst reports from investment banks covering the sectors. Though limited research may be available, their projections provide useful perspective.
- Review news and company announcements to gauge business momentum and respond to latest results. Stay informed on their strategic direction.
- Study the management team’s background and track record. Founders with demonstrated sector expertise improve odds of success.
- Follow conference schedules and presentations. Management often discloses important details about products, pipeline progress, partnerships, and more.
- Limit purchases to companies you thoroughly understand with business models that make inherent sense to you. Avoid chasing “hot stories.”
While higher risk, small caps becoming emerging leaders can be enormously rewarding. Do your due diligence and monitor closely, but don’t miss out on their game changing potential early on.
Should You Invest in Small Cap Stocks?
Here are some guidelines for investors considering small cap stocks:
- Limit small caps to only 10-20% of your total portfolio to control overall risk exposure.
- Ensure you have a long investment time horizon of 5+ years. Small caps carry more volatility, and their growth trajectories take time to play out.
- Focus on profitable companies in growing industries to balance growth with financial stability. Avoid unproven or perennially money-losing small caps.
- Diversify across multiple small caps and sectors to minimize concentration risk. Complement with blue chip stocks and bonds for balance.
- Use limits/stop losses to protect against sudden declines. Small caps can have large price swings, so manage downside.
- Be ready to hold through volatility. Don’t panic on temporary dips – ride out the ups and downs towards long-term gains.
- Keep position sizes modest. Outsized bets increase risk of large losses if investments go sour.
With the right strategy, small cap stocks can supercharge portfolio returns. But their inherent risks call for an informed, tailored approach to turn their full potential into realized rewards.
Small cap stocks require thorough research and monitoring but can deliver market-beating returns for investors with appropriate time horizons and risk tolerance. The companies profiled here exhibit promising attributes to deliver strong gains in 2024 and beyond.
Key considerations for successful small cap investing include:
- Evaluating growth opportunities, competitive strengths, management and financial health
- Spreading investments across multiple stocks and sectors
- Limiting position sizes and utilizing stop losses
- Allowing long timeframes for growth stories to unfold
While higher risk, small caps make the transition into mid caps and large they offer some of the most lucrative investment opportunities. A prudent small cap investing approach can yield multi-bagger returns and turbocharge overall portfolio performance over time.
Frequently Asked Questions
What is considered a small cap stock?
Small cap stocks typically have a market capitalization of between $300 million and $2 billion. Companies this size are usually younger and have the potential for rapid growth.
Are small cap stocks riskier?
Yes, small caps tend to be riskier than large caps due to lower financial strength, reliance on narrow business lines, and weaker competitive positions. Higher due diligence is required.
What return can you expect from small caps?
If selected wisely based on fundamentals, small caps can significantly outperform large caps. Returns in the 15-30% per year range are possible for top performers. However, negative returns also occur, so prudent risk management is key.
Should small caps be a major part of my portfolio?
Most experts suggest limiting small caps to 10-20% of your total portfolio. This way, they provide growth upside without dominating overall risk exposure. The remainder can be held in safer large cap stocks and bonds.
How long should you hold a small cap stock?
Long holding periods of at least 3-5 years are recommended for small caps to allow the investment thesis to fully develop. However, cut losses quickly if fundamentals deteriorate.
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