Investing

3 Small Cap Gems That Could Be Big Beneficiaries Of This Ongoing Capital Rotation

Chris MacDonald

Published: September 13, 2024 7:00 am

This week’s CPI report came in roughly in line with expectations, with average prices paid by consumers rising 2.5% on a year-over-year basis. Core inflation did come in a bit hotter than expected, but many now expect to see a 25 basis point rate cut from the Federal Reserve on the horizon. Currently, betting markets have two 50 basis point cuts priced in for the rest of the year, but we’ll have to see how those probabilities change over time.

In terms of what this means for the stock market, there are varying opinions on where certain groups of stocks could be headed. Small-cap stocks have struggled compared to large-caps due to inflation and rising interest rates in recent years, though a rotation toward small caps and away from mega-cap high-growth tech names continues to be building. If this trend continues as interest rates come down over the coming months, this could be a trade worth considering for those taking a medium-term position in the market.

Accordingly, I’ve highlighted three stocks below I think fit the value-conscious investor portfolio well. These are three stocks currently on my watch list, and I’d invite investors to do their own research on these names and watch how they perform over time. If there are any significant market dips, these are three stocks I’d consider adding here.

Key Points About This Article:

• A rotation has been building toward small-cap stocks and away from larger growth-heavy names.
• If this rotation continues, the following three stocks could turn out to be excellent long-term picks.
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

The Metals Company (TMC)

The Metals Company (NASDAQ:TMC) is a rather intriguing stock that’s been on my radar for some time. The deep sea mining company has developed a way to mine lithium and other necessary metals for the production of batteries from the sea floor. While some environmental concerns remain around what this may mean for deep sea ecosystems, many supporters believe that such a mining practice could be beneficial relative to the current mining practices in place for the sector. 

The company recently reported decent Q2 2024 results, with a net loss of $0.06 per share in line with what many analysts had expected. The company does have around $48 million in liquidity on its balance sheet and is burning around $12 million in cash each quarter, so as long as operations start within the next year or so, the company could be poised for a significant move higher.

It’s worth noting that TMC stock currently trades at less than $1 per share, so this is a risky bet to say the least. However, in this past quarter, the company did announce the publication of its third Impact Report, producing the first-ever cobalt sulfate from seafloor nodules. Additionally, The Metals Company appointed Steve Jurvetson and Brendan May to the Board. Despite share price challenges over the past year, the company’s management team remains optimistic on its long-term outlook, highlighting progress in ISA Mining Code talks and growing interest in seafloor resources.

In my view, this is a stock to consider at current levels, though I’d be more enticed around the $0.75 per share level moving forward.

Paycom Software (PAYC)

Paycom Software (NYSE:PAYC) provides cloud-based human technology management services to its clientele. Operating with a software-as-a-service (SaaS) model, Paycom’s business model benefits from long-term secular trends in automation and personalized client services. 

The company’s external salesforce has excelled in acquiring new clients with its automated solutions, and innovations like Beti for employee-managed payroll highlight its cutting-edge approach. This hasn’t helped the company’s stock price, which is down roughly 30% this year and more than 75% from its high. But as hiring trends (hopefully) improve as interest rates come down, this is a stock with some cyclical exposure certain investors may be intrigued by. 

Notably, the company reported strong Q2 2024 results, with Paycom’s revenue reaching $437.5 million. This number exceeded guidance, surging more than 9% year-over-year. Additionally, Paycom’s adjusted EBITDA hit $159.7 million, also surpassing expectations. Despite adjusted EPS remaining at $1.62, GAAP net income slightly increased to $68 million, while non-GAAP net income fell to $91.8 million. 

The company revised its Q3 guidance on these results, now expecting revenue between $444 million and $449 million and adjusted EBITDA between $155 million and $159 million. The company also increased its full-year forecast to $1.86 billion to $1.875 billion in revenue and $727 million to $737 million in adjusted EBITDA.

For those bullish on longer-term automation trends, this is a stock I think is worth keeping on the radar right now.

Ingles Markets (IMKTA)

Ingles Markets (NASDAQ:IMKTA) is a popular supermarket chain in the southeast U.S., which has been around for more than 60 years. The company’s focus is on providing the daily essentials, with a vertically-integrated business model that has served the company well. 

Like the other stocks on this list, Ingles is down this year, and has been trending lower for some time. However, the company has seen comparable store sales growth of 4.9% in Q4, with annualized sales increasing 9.6% to $1.8 billion. Net income grew 41.4% to $18.7 million this past quarter, excluding impacts from a gender discrimination lawsuit settlement. The company continues to tout strong growth in a sector that’s been otherwise beaten down, and I think Ingles’ relative performance is worth pointing out.

If consumers can catch a break from lower borrowing costs across the board, an argument could be made that beaten-down retailers could see a nice uptick moving forward. A number of analysts have upgraded their ratings on this particular stock, in light of such a view. While this may be another higher-risk bet in the grand scheme of things, I do think IMKTA stock could be a beneficiary of many of the broader trends we’re seeing play out in the markets right now.