Small-cap stocks are back in favor. After languishing behind their larger brethren for years, small-cap stocks are roaring ahead as investors rotate into the sector once more.
The small-cap Russell 2000 index is up 10% in July versus the S&P 500’s flat performance and the tech-heavy Nasdaq 100 falling close to 5%. It was a reversal that was bound to happen and has been in preparation for a while.
Tech stocks were the stars for the past two years as artificial intelligence mania gripped the market. Yet ahead of the hoped-for interest rate cuts in September, the frenzied growth of the sector did not seem sustainable.
Small-cap stocks, on the other hand, have been hardest hit by the Federal Reserve’s monetary policies. Because they are smaller, small-caps don’t have the same access to money as larger companies do. That means debt borrowing is more expensive. Small-cap stock growth over the past two years was stunted because of it.
The S&P 500 outpaced the Russell 2000 by more than 50% while the Nasdaq 100 easily more than doubled the small-cap index’s performance. Now the tide is turning and these three small-cap stocks should be on your radar.
Longeveron (LGVN)
Clinical-stage biotech Longeveron (NASDAQ:LGVN) seeks to treat age-related and life-threatening conditions. Its lead investigational drug Lomecel-B can treat a wide array of diseases but is in Phase 2b trials for treating a rare pediatric congenital heart birth defect called hypoplastic left heart syndrome (HLHS).
After completing an investigator meeting to discuss the drug’s progress and operational implementation of the clinical trial, Longeveron stock tripled in value. Although it gave back much of those gains and remains down 75% for the year so far, there is an excellent chance Lomecel-B continues to advance.
Earlier this month the therapy was granted a regenerative medicine advanced therapy (RMAT) designation for treating Alzheimer’s patients. Lomecel-B showed a slowing or prevention of the disease’s worsening compared to a placebo. The RMAT designation is intended to speed up the development and review of regenerative medicine therapies.
Longeveron took the opportunity of its stock soaring to raise money by selling stock. And with shares still 300% above their recent lows it may do so again to further bolster its balance sheet.
Netgear (NTGR)
At one time, Netgear (NASDAQ:NTGR) was a top-notch networking equipment company. These days, it struggles along. Over the last five years the stock lost 53% of its value but has lagged behind the Russell 2000 over just about any time period you look at. Over the past decade, where the small-cap stock index has doubled in value, NTGR stock lost 20%.
Wall Street, though, is starting to sing a different tune about Netgear. In an investor note, analysts at Raymond James recently said the company was “forgotten about by investors and even the sell-side” analysts.
According to Investing.com, the Windward Management hedge fund recently took a 4% stake in the networking equipment maker. It believes Netgear’s worst is behind it. The supply chain woes from the pandemic are behind it, it remains profitable on an EBITDA basis as it has for the past two decades and its shares are cheap, trading for around the cash it had in the bank at the time.
With the market essentially assigning it zero value, Netgear stands to gain as new management cleans out its inventories and its Netgear for Business segment remains strong. The stock is up 36% since early May and if management heeds Windward’s suggestion for a big stock buyback program, shares could run even higher.
Solid Power (SLDP)
Solid-state battery maker Solid Power (NASDAQ:SLDP) isn’t in commercial production yet but is speeding development of its advanced cell designs. It is a highly speculative small-cap stock but one that could pay off long-term.
Part of the bull thesis behind Solid Power is the strong backing it is receiving from the automotive industry. Both Ford (NYSE:F) and BMW (OTCMKTS:BMWYY) are behind the company. It also has a deep partnership with SK On, the South Korean lithium-ion battery subsidiary of SK Innovation.
Solid Power installed a manufacturing line for SK On, which is licensing SLDP’s design and technology. Solid Power also says it is on track to deliver to its partners its next-generation prototype A-2 cell for testing. As Solid Power meets its various milestones, it receives payments from its partners.
The first quarter saw such payments rise by $2.2 million to $6 million. It’s not much but indicates Solid Power continues on the correct growth trajectory. At less than $2 per share, the solid-state battery maker will be volatile. That means investors should not dive whole hog into this small-cap stock. But as an investment for the speculative portion of your portfolio, Solid Power could be one of numerous solid-state battery makers to consider.
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On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.