The equity markets are off to a strong start in 2024. But does that mean it’s time to look at small-cap growth stocks? It may be, and here’s why.
As January comes to a close, the market rally has not yet spread to the small-cap sector. The small-cap Russell 2000 index is down 3.2% in January. And over the last 12 months, the index has been essentially flat, with only minor gains at any given time. Over the last five years, however, this index is up almost 30%. And historically, the beginning of a broad market rally is led by small-cap stocks.
Will history repeat itself in 2024? Several factors are involved in that forecast. First, the economy will have to avoid a recession. At the same time, it can’t get so healthy that the Federal Reserve decides to forgo cutting interest rates. Many of these small-cap companies are still in growth mode and rely on a lower cost of capital.
Investors will also want to see valuations remain attractive. The price-to-earnings (P/E) ratio for the Russell 2000 index as of January 26, 2024, is 27.23x. That’s significantly lower than the 52.4x of just a year ago, but is still above pre-pandemic levels. Nevertheless, if you’re hunting for small-cap growth stocks right now, here are three names to consider.
Lovesac (LOVE)
Lovesac (NASDAQ:LOVE) is a company that is revolutionizing the home furnishings market through both the form and function of its products. The company’s signature product, the “sactional,” lets consumers buy furniture that’s designed around their lifestyle more than the space it occupies.
The sactionals are made in part from recycled water bottles making the company a leader in the circular economy.
Lovesac is also disrupting the industry with its direct-to-consumer (DTC) model. It’s part of the company’s balanced omnichannel strategy which includes an expanding network of showrooms.
In its most recent quarter, Lovesac reported net sales growth of 30.7%, which is in line with the company’s five-year compound annual growth rate (CAGR) of 31.4%. The company also has a strong 52.8% gross margin which is only slightly lower than the 54.9% it posted for the full year in 2022.
LOVE stock is rallying hard in the last three months, up 34%. However, analysts continue to see a higher upside. The consensus price target of $41.40 is 80% higher than its current price, and all five analysts that offer a rating give the stock a Strong Buy rating.
Here’s where the story gets interesting. Short interest on LOVE stock is over 26% making it one of the most heavily shorted stocks in the market. If that sounds odd considering the company’s growth projections, you may be on to something.
Blue Bird (BLBD)
When using a stock screener to find low P/E growth stocks, Blue Bird (NASDAQ:BLBD) pops up as an interesting name to consider with a 15.5x forward P/E rating. And that’s said with the full awareness that BLBD stock is up 103% in the last 12 months and 17.6% in the last month alone.
Blue Bird manufactures both diesel-powered and electric school buses. The latter is what has been causing some of the latest price action in the stock. In Jan. 2024, the company received an order for 180 electric school buses from the Los Angeles school district.
However, that order is only the latest win for the company. Revenue and earnings have been increasing steadily year-over-year (YOY). In fact, the company went from a 23% net loss in 2022 to a 19% net profit in 2023. And the company increased its guidance for fiscal year 2024.
BLBD stock is hitting the top of its current consensus price target. However, analysts have been bidding the stock higher in advance of the company’s next earnings report in February.
VirTra (VTSI)
VirTra (NASDAQ:VTSI) is a tiny company with just a $115.39 million market capitalization as of this writing. The company offers training simulations that deliver force and firearms training for military, law enforcement and government uses.
The company uses artificial intelligence (AI) both in the creation and the analysis of its content. One of the company’s latest products, the V-XR extended reality headset, is generating a strong response including pre-orders that are part of the company’s $16 million backlog.
The company is only covered by two analysts, but both give the company a Strong Buy rating and are bidding the stock higher. On the other hand, short interest is up 207% compared to last month. That may be because the stock is also up 118% in the last 12 months.
That robust increase is likely to create short-term volatility in VTSI stock. But with a strong growth forecast, speculative investors may want to use any opportunity to buy on a dip.
— Chris Markoch
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Source: Investor Place