In late 2023, many analysts predicted a resurgence of small-cap stocks in 2024. These stocks took a hit as the Federal Reserve aggressively raised interest rates, making it harder for many of these companies to borrow money to fund their growth. However, 2024 saw the Russell 2000 index, a benchmark for small-cap stocks, climb by 20%. While not all small-cap stocks participated in this rally, the Federal Reserve’s September rate cut, potentially the first in a series, points toward improved borrowing conditions for these companies. This is particularly good news for small-cap stocks with strong fundamentals, such as the ones highlighted below.
Star Bulk Carriers Corp. (SBLK): Riding the Wave of China’s Stimulus
Dry bulk carrier stocks may not be the most exciting, but Star Bulk Carriers Corp. is worth watching as we head into 2025. As the largest U.S.-listed dry bulk company with a fleet of 160 vessels, Star Bulk boasts a strong balance sheet and has been consistently reducing debt at a rate of $250 million annually. This trend is expected to continue. The company’s short-term growth prospects are closely linked to China’s economic stimulus measures, which are likely to increase demand for raw materials like iron ore. In the first seven months of 2024, dry bulk shipments to China saw a 7.5% increase, a trend that is expected to intensify with the new stimulus package. Furthermore, SBLK stock is trading at a modest forward earnings multiple of 6.9x, and analysts have a consensus price target of $29.33, suggesting an upside potential of about 28% for investors. Add to this a 12.2% dividend yield, and Star Bulk becomes a compelling investment opportunity. The primary risk, however, is the possibility of higher oil prices, which could negatively impact earnings.
Evolv Technologies Inc. (EVLV): A Play on AI in Security
Evolv Technologies, a provider of AI-powered next-generation metal detection systems, has seen its share price soar by 59% in the 90 days leading up to October 3, 2024. The company’s Evolv Express system offers a touchless security screening solution, ensuring uninterrupted flow of people through venues. Since 2019, Evolv’s technology has screened over one billion individuals, gaining popularity among professional sports teams, hospitals, churches, and school systems seeking non-invasive security measures. Despite the recent surge, EVLV stock remains down 17.3% for the year and over 15% in the past 12 months. While the company achieved its first profitable quarter, concerns linger regarding earnings and competition. However, the company’s growing annual recurring revenue (ARR) suggests that these concerns may be overstated.
Central Garden & Pet Company (CENTA): An Undiscovered Gem
Central Garden & Pet Company, as its name suggests, operates in two distinct sectors: garden and pet. The garden sector offers a variety of lawn and garden supplies, while the pet sector caters to dogs, cats, and other pets. Despite lagging the broader market, CENTA stock has gained approximately 3.8% in 2024. While the company has experienced a slight decline in revenue, its earnings have shown year-over-year growth. The company attributes this to continued strong spending by consumers on their pets. Central Garden & Pet has also implemented measures to navigate challenges in its garden division. Analysts on MarketBeat express bullish sentiment for CENTA, with a consensus price target of $42, indicating a potential upside of 43% for the stock. These three small-cap stocks offer compelling opportunities for investors seeking to capitalize on the potential growth of the small-cap market in 2025. Their strong fundamentals, robust growth prospects, and attractive valuations make them worthy contenders for outperforming the market in the coming year.
