Small-cap stocks have often been seen as high-risk, high-reward assets that can offer substantial returns, particularly during periods of market optimism. While this year has been a challenging one for small-cap stocks, with the Russell 2000 index gaining only 11% compared to the S&P 500’s impressive 26% increase, the upcoming years could present a significant shift. As President-elect Donald Trump prepares to take office, a wave of investor optimism focused on deregulation may position small-cap equities favorably in early 2025. This article examines the factors influencing small-cap performance and highlights select stocks that could capitalize on the potential growth opportunities ahead.
Investors typically allocate capital to small-cap stocks with the expectation that these companies can outpace their larger counterparts. Historically, small caps have shown robust performance during economic recoveries and expansion periods, as they often benefit more than large corporations from increased consumer spending and investment. However, this year has presented a unique contrast, as the broader market has thrived while many small caps have struggled.
The current climate is stirred by heightened investor interest following Trump’s election, which promises a business-friendly environment. Easing regulations could significantly drive profit margins for smaller firms, potentially unlocking their latent capacities for growth. This sentiment has resulted in a rally in small-cap stocks after the election results, setting the stage for a potential boom in the next few years.
Key Criteria for Selection
To identify promising small-cap stocks, a thorough evaluation is essential. By utilizing a set of criteria focused on valuation and projected performance, investors can pinpoint companies that appear undervalued relative to their sectors and sub-industries. The following filters can be particularly useful:
1. **Valuation**: Stocks that trade at a discount compared to both their sector and sub-industry averages.
2. **Price Target Upside**: Potential for price appreciation relative to analysts’ targets.
3. **Recent Performance**: Year-to-date gains can indicate momentum, especially stocks that have increased by more than 5% in the past month.
Using these criteria, we can highlight several small-cap stocks that may capitalize on emerging trends and investor sentiment in 2025.
One noteworthy candidate is **Bath & Body Works**, which has experienced a decline of over 9% this year. Despite this setback, analysts project approximately 20% upside potential for the stock in 2025. Analysts believe that the company is on the verge of a renaissance following a series of strategic marketing initiatives and a focus on expanding its product lines. According to Jonna Kim of TD Cowen, this stock represents an “underappreciated story,” suggesting long-term growth prospects bolstered by a real estate strategy moving beyond traditional mall locations.
In the airline sector, **Alaska Airlines** shows incredible promise, with its shares rising 73% this year. With a projected upside of 16%, the excitement surrounding the company is primarily attributed to its strategic acquisition of Hawaiian Airlines. Morgan Stanley analysts see the merger as a transformative step, positioning Alaska Airlines as a more formidable player in the evolving airline industry landscape. With favorable comparisons ahead as it catches up with prior performance challenges, Alaska Airlines could be on a robust recovery path.
Another interesting option is **Academy Sports and Outdoors**, which has dipped nearly 12% this year, yet analysts foresee approximately 17% upside entering 2025. With Citi initiating coverage on Academy with a buy rating, there are inklings that the retail segment may recover as pandemic-related pressures ease. The company’s ambitious expansion strategy—from 298 to potentially 800 stores—could significantly contribute to its growth, indicating a strong tailwind for revenue generation.
Lastly, **Sprinklr**, which has seen a year-to-date loss exceeding 25%, may also present a unique investment opportunity with an upside potential of around 9%. As a cloud-based platform providing customer experience management, the increasing importance of digital engagement underscores the potential for future growth as businesses increasingly pivot towards digital channels.
The small-cap landscape offers a plethora of opportunities, particularly as the business environment shifts toward greater optimism post-election. While the year has posed challenges for many small-cap stocks, a range of companies appears poised for potential recovery and growth in 2025. A thorough analysis based on market trends, corporate strategies, and economic conditions can assist savvy investors in identifying the ‘diamonds in the rough’ within the small-cap segment. As always, informed decision-making should guide investment strategies, ensuring individuals stay attuned to evolving market dynamics.