The stock market came roaring back in 2023, with the S&P 500 Index closing the year close to its record-high level from the beginning of 2022, but many individual stocks have been left out of the rally. The seven largest stocks in the S&P 500 were responsible for most of the index’s 25% gain, while results were more mixed for the other 493 large companies in the index as well as small- mid-cap stocks.
The Russell 2000 small-cap index finished the year strong in the last two months to post a 15% gain, though it still sits 16% lower than its November 2021 apex. Small-cap investors still rave that small caps are a bargain because of big valuation gaps from market leaders. They anticipate a rotation into their corner of the market in the coming year.
“It’s been a real surprise that the big-cap growth stocks have come back so fiercely,” says John Rogers, founder of Ariel Investments and a longtime small-cap value acolyte. “I still think that whenever people start to buy stocks just because they’re a big part of an index, that’s a sign that it’s topping out, so I’m not bullish on the Magnificent Seven for 2024. Competitive threats will be coming from places you never can imagine.”
For ideas outside of the companies that have grabbed all the headlines in 2023, Forbes surveyed Rogers and five other veteran small-cap investors for their top recommendations for 2024. Here are 12 stocks they highlighted.
John Rogers
Founder, Co-CEO and CIO of Ariel Investments
Market Capitalization: $1.5 billion
12-Month Revenues: $851 million
Rogers’ Ariel Investments is a longtime holder of Madison Square Garden Entertainment, and he’s still enamored with the stock’s potential. “It’s very hard to replicate or build a competitive arena in New York City, one of the world’s greatest cities,” he says. Aside from the Garden, the company also has a long-term lease of the Radio City Music Hall and owns the brand of the Christmas Spectacular, which brings hoards of people to Midtown every December to see the famed Rockettes. “These are businesses that are going to thrive from generation to generation,” adds Rogers. In April, MSGE spun off from Sphere Entertainment Co. (SPHR), which owns and operates the futuristic new Sphere in Las Vegas, a stock Rogers also loves which is up 65% this year, while MSGE has been flat since the split.
Market Capitalization: $1.3 billion
12-Month Revenues: $1.5 billion
It’s been a rough three years for pool supplies retailer Leslie’s since its October 2020 IPO, with the stock down 59% from its IPO price of $17 per share, but that’s often the kind of stock that catches Rogers’ attention. “We like to buy stocks when there’s a cloud over them that people aren’t excited about,” says the tried and true value investor. Leslie’s is the largest seller of pool supplies and chemicals in the U.S. and is expanding to partner more with professional pool servicers. Its revenue in the spring and summer quarters was down 9% compared with last year—Rogers says one factor was a cooler summer in California, causing people to spend less time in their pools and chemicals to age at a slower pace. Rogers is optimistic that its plans to pay down debt and a new CFO who’s helping control costs will lead to a turnaround for the stock next year.
Kenneth Farsalas
Portfolio Manager, Oberweis Micro-Cap Growth and Oberweis Small-Cap Opportunities
Market Capitalization: $4.4 billion
12-Month Revenues: $1.1 billion
Farsalas has owned Axcelis for several years as the stock has gone from a micro-cap to one of the Russell 2000 index’s larger companies and still sees catalysts on the horizon to push it even higher. Axcelis specializes in ion implantation in semiconductors, a process that is more important and intensive for the manufacturing of silicon carbide semiconductors which are integral to electric vehicles because they conduct electricity more efficiently than standard semis. Axcelis is “by far the dominant player with the best product,” Farsalas says, commanding 70% to 80% of the ion implant market for silicon carbide and higher power applications. They have a backlog of about $1.2 billion, about a year’s worth of revenue, and are already taking orders into 2025, and Farsalas thinks a rebound in the semiconductor memory market will augment its results. He expects earnings to approach $12 per share in 2025, compared with $7 per share now. “You can buy this business for a little over 10 times the earnings power that we expect in 2025, so we think it’s a growth company that actually represents a really compelling value right now,” says Farsalas.
Market Capitalization: $2.1 billion
12-Month Revenues: $2.9 billion
One stock Farsalas bought this year after a second-quarter earnings beat was SkyWest, a private label airline that flies regional routes for United, American, Delta and Alaska Airlines. It bought back about $250 million in stock in 2023 and has an “exceptional balance sheet for an airline,” Farsalas says, with $820 million in cash and just over $3 billion in debt. Pilot shortages in recent years have been a headwind, with baby boomers retiring and many leaving the workforce during the pandemic, but that problem is improving, particularly at a small airline that’s more accessible to new pilots. “As pilot availability improves, they actually have unused aircraft that they can bring back into service so they can add 15% capacity to their flying routes without buying a single plane,” says Farsalas. Another differentiator between SkyWest and major airlines is that SkyWest passes fuel costs through to the main carriers. While it earned around 50 cents per share in 2023, analysts expect that to increase significantly to $5.64 per share in 2023, and Farsalas thinks it can be as much as $8 per share in 2025. The stock more than tripled in 2023 in anticipation of strong results, though it still trades below its pre-pandemic highs.
Amy Zhang
Portfolio Manager, Alger Small Cap Focus and Alger Small Cap Growth
Market Capitalization: $1.8 billion
12-Month Revenues: $297 million
PROS Holdings is a cloud-based software company that provides price optimization and revenue management services to other businesses, primarily airlines, and is now expanding its predictive AI and machine learning capabilities to other industries. “The secret sauce is its algorithms,” says Zhang. It’s the market leader in dynamic pricing software, helping businesses forecast demand and set prices accordingly. The pandemic crushed the stock when air travel all but shut down, with shares falling close to 60% in the first quarter of 2020 and remaining stagnant in 2021 and 2022, but revenue growth resumed at a 10% clip in 2023, helping the stock rebound 64%. Zhang says the Houston-based firm reached an inflection point in becoming free cash flow positive this year and envisions continued margin expansion for the next three to five years as it penetrates verticals like manufacturing, energy and food.
Market Capitalization: $7.3 billion
12-Month Revenues: $989 million
Alger is also a longtime holder of Natera, a genetic testing company based in Austin, Texas which was founded in 2004. Its core initial business was reproductive health and non-invasive prenatal testing, but it has since expanded to testing and monitoring for cancer recurrence with its Signatera product, which Zhang calls its “most significant growth engine” for the next 5-10 years. Its third branch does diagnostic testing for organ transplants. “They’ve built a moat and they’re gaining market share in all three markets,” says Zhang. “We always say we invest in companies that save lives, time, money or headaches, but after Covid, nothing is more important than saving lives.” Its revenue is growing 27% year over year, and Zhang expects certain clinical guidelines to be revised next year that will be a boon for its revenue and gross profit.
James Davolos
Portfolio Manager, Horizon Kinetics
Market Capitalization: $2.7 billion
12-Month Revenues: $184 million
To prepare for a year of expected interest rate cuts and lower yields, Davolos recommends some exposure to gold, and thinks royalty companies with dependable revenue streams are a safer bet than buying miners directly. While large-cap royalty and streaming stocks Franco-Nevada and Wheaton Precious Metals trade at premiums of over two times net asset values, Montreal-based Osisko comes more cheaply for investors, even with its net asset value. Its crown jewel is a 5% net smelter royalty on Canadian Malartic, the second-largest gold mine in Canada, and it simplified its business after a management shakeup by selling off its $100 million of equity in separate gold miner Osisko Mining, encouraging investors who are more interested in a pure-play royalty stock. The stock jumped 12% in the week after the deal. “This is a high-quality royalty business where your base-case returns are robust even without appreciation of the gold price, but there’s a nonlinear relationship where returns can get substantially higher if we see gold rerate in this type of macro regime,” says Davolos.
Market Capitalization: $663 million
12-Month Revenues: $101 million
OTC Markets Group operates markets for trading 12,000 U.S. and international stocks that aren’t listed on major exchanges like the New York Stock Exchange or the Nasdaq, and its sales and profits are steadily growing with high margins thanks to high trading volumes, listing fees and data fees. Even as total stock listings are declining worldwide and the last two years have been sparse for major IPOs, small companies are still listing on over-the-counter markets, attracted by more lax reporting requirements and lower expenses. Owning an exchange is also a helpful hedge against volatility, which results from high trading volumes and helps stocks like OTCM. “Obviously, the global financial crisis was horrible for equity prices, but exchanges were having record profits—same thing during the first and second quarter of 2020,” says Davolos. “To the extent that we go into a higher volatility regime, the exchanges are going to print money.” OTCM has been roughly flat for the last two years following a 74% gain in 2021.
Nicholas Galluccio
Portfolio Manager, Teton Westwood Small Cap Equity Fund
Market Capitalization: $1.6 billion
12-Month Revenues: $1.6 billion
Openlane is a digital marketplace for used car sales and auctions that Galluccio has loved, particularly since it sold its physical locations to Carvana for $2.2 billion in May 2022, more than the market cap of the whole company. “It was the greatest sale in history,” Galluccio says. “They paid their debt down, so now they’re almost debt free.” Used car prices spiked during Covid but are coming down now, leading dealers to offload some of used cars through auctions and giving more volume to Openlane, says Galluccio. Its sales this year are growing and it’s currently trading at 7.7 times 2024 EBITDA expectations, a bargain for value investors. Shares gained 15% in 2023, and Galluccio’s upside price target is $25 per share, 65% higher than its current level around $15, with less risk on the downside because of its clean balance sheet.
Market Capitalization: $1.7 billion
12-Month Revenues: $690 million
Sales are down 15% in the last 12 months for this tech stock which manufactures semiconductor wafer handling equipment, inspecting wafers for customers like major chipmakers Intel, Applied Materials, Texas Instruments and more. Galluccio says the decline in business is due to an inventory buildup during Covid when customers down the supply chain became overstocked, but the company is expecting a turnaround beginning next year. “We may be a couple of quarters away from the inflection point where supply and demand in this destocking come back into balance, maybe one quarter away, but the snapback will be quick,” says Galluccio. Its enterprise value to EBITDA multiple is at about 12 times, but if EBITDA recovers to where he thinks it will in 2024 and 2025, that figure would be at a cheap 7 times. Its end market in the cell phone business is improving, but Galluccio says autos and industrials are still weak and expects the stock to rise when those begin to improve Cohu’s top-line numbers next year.
Bryan Wong
Portfolio Manager, Osterweis Emerging Opportunity Fund
Market Capitalization: $6.2 billion
12-Month Revenues: $533 million
Wong’s $194 million small-cap fund has generated annualized returns of 10.7% in the last 10 years, outperforming the Russell 2000 Growth Index by four percentage points, and more than a third of its portfolio is in tech stocks. One is DoubleVerify, a software business acting as a “seatbelt for digital advertisers,” he says. It receives an analysis fee based on the volume of advertisements its analytics measure to ensure businesses don’t waste money buying blocked or fraudulent ads and they’re presented in places that preserve their brand. For example, IBM suspended advertising on X, formerly called Twitter, in November after a Media Matters report found ads running next to antisemitic content, a scenario Wong says DoubleVerify would be able to flag to enterprise customers. Its sales are up 26% in the last 12 months, it’s consistently profitable and Wong says it has a lot of room for growth in social media advertisements, which account for just 16% of its revenues but 60% of all digital ad spending today.
Market Capitalization: $4.1 billion
12-Month Revenues: $352 million
Based in Boise, Idaho, Clearwater Analytics is a cloud software firm that offers automated accounting and compliance services for institutional investors. “They have the best technology in the space, similar to DoubleVerify, replacing legacy software primarily,” says Wong. It went public in 2021 and rose 41% in its first day of trading, but like many newly-public software companies has struggled since then, now trading 21% lower than its initial close. Wong says its original business model tied to a percentage of clients’ assets under management came with unwanted volatility due to last year’s swings particularly in the fixed income market, which accounts for a majority of the $6.4 trillion in assets its platform covers. In 2022, Clearwater began transitioning to what it calls a “base plus” model, charging clients a base fee that it can increase annually plus incremental fees for increases in assets and supplemental services, limiting its downside in sales. This shift has helped its 12-month revenues grow 21% through September 2023.