We recently published a list of 10 Small Cap Stocks with High Potential. In this article, we are going to take a look at where Dave Inc. (NASDAQ:DAVE) stands against other small cap stocks with high potential.
As we transition from a tumultuous summer in the financial markets, characterized by rising expectations for interest rate cuts and the consequent impacts on stock and bond performances, investors are now navigating a landscape of heightened volatility and uncertainty. The small-cap segment of the stock market has garnered increasing attention in 2024, as expectations of a shift in monetary policy continue to evolve. Since early July, smaller companies have notably outperformed their larger peers, signaling a robust appetite for these stocks despite ongoing economic uncertainty. This trend has spurred interest among investors looking for high-growth potential opportunities within a more volatile market environment.
Nancy Prial, Co-CEO and Senior Portfolio Manager at Essex Investment Management, shared her optimistic outlook for small cap stocks in a recent interview with CNBC on September 30. Prial expects small cap stocks to gain momentum as a result of the rate cuts that have already occurred and additional expected reductions. According to Prial, small-cap stocks remain under-owned in the market and represent only a small percentage of the overall equity market. She highlighted that the conditions are ripe for a strong performance by smaller companies, provided there is a confidence boost from navigating a soft landing rather than a recession.
Prial emphasized that stock selection will be critical in this environment, as not all small-cap stocks are likely to benefit from rate cuts equally. She anticipates that some small-cap companies could see earnings growth in the range of 15% to 20% next year, driven by strong fundamentals and growth-oriented business models. According to Prial, while the broader indices may not deliver the same level of returns, select companies within the segment have the potential to outperform significantly.
As the outlook for the small-cap market brightens, sectors like technology are also poised to benefit from advancements in artificial intelligence and automation. Prial mentioned that these areas could drive innovation and growth within the small-cap segment, offering compelling opportunities for investors. With clear signals from central banks and ongoing technological developments, smaller companies are positioned to capitalize on emerging trends, making them an attractive option for those seeking to diversify and tap into high-potential stocks in the final quarter of the year.
Tom Lee, Head of Research at Fundstrat Global Advisors, echoes a similarly bullish sentiment. Lee believes that the recent volatility in small-cap stocks is part of a multi-year bottoming process, driven by economic data and investor expectations. Despite the unpredictability, Lee expects a significant rally in small-cap stocks once there is clarity on the rate cut cycle. He notes that small caps, which typically trade at 10 times forward price-to-earnings ratios, offer better earnings growth prospects than many mega-cap growth stocks. For Lee, the easing of monetary policy and improving fundamentals make small caps a compelling buy, even in the face of near-term volatility.
One of the primary drivers behind the renewed interest in small-cap stocks is the anticipated easing of monetary policy by central banks. As inflation cools down and economic growth slows, analysts widely expect a series of rate cuts in the coming months. Lower borrowing costs would benefit small-cap companies, which often rely on traditional bank loans instead of accessing corporate bond markets like their larger counterparts. As a result, smaller companies are likely to benefit more directly from the expected rate cuts, making them appealing investment opportunities as the economy starts to recover.
While optimism is building, investing in small-cap stocks does come with risks. A significant portion of these companies have reported negative earnings over the past year, emphasizing the need for a selective approach. Analysts recommend focusing on profitable sectors such as financials, utilities, and consumer discretionary, which have shown resilience despite economic headwinds. Financials, for instance, have delivered robust earnings, while utilities have performed well, although they represent a smaller portion of the market capitalization.
By diversifying portfolios with strategically selected small-cap investments and leveraging the stabilizing power of bonds, investors can position themselves to not only weather market fluctuations but also thrive in the evolving economic environment. The remainder of 2024 could very well be a pivotal period for small-cap stocks, providing opportunities for those willing to embrace the associated risks and rewards.
Our Methodology
For this article, we used the Finviz screener and identified 20 stocks with market cap of less than $2 billion and having Buy or Buy-equivalent ratings and traget price 40% above current price from analysts as of October 5. These stocks have also gained more than 100% in value year to date in 2024. Next, we examined Insider Monkey’s data on 912 hedge funds as of Q2 2024. We narrowed down our list to 10 stocks most widely held by institutional investors and ranked them in ascending order of the number of hedge funds that have stakes in them as of Q2 of 2024.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A customer using the personal financial management tool to navigate their finances.
Dave Inc. (NASDAQ:DAVE)
Number of Hedge Fund Holders: 13
Market Cap as of October 5: 545.70 Million
Average Analysts’ Target Price as of October 5: $61.86
Year to date Share Price Gain: 413.66%
Dave Inc. (NASDAQ:DAVE) is a promising small-cap stock that deserves attention for its innovative financial services platform. The company, headquartered in Los Angeles and founded in 2015, offers a range of financial products, including budgeting tools, short-term liquidity options, and a digital banking solution. Its unique products, such as ExtraCash, a short-term liquidity tool, and the Dave Banking digital checking account, have made it a popular choice for Americans seeking accessible financial solutions. Given its robust growth trajectory and strategic initiatives, Dave Inc. (NASDAQ:DAVE) is well-positioned to capitalize on the expanding financial technology market, making it a strong candidate for small-cap stocks with high potential.
In its second quarter of 2024, Dave Inc. (NASDAQ:DAVE) reported impressive financial metrics, showcasing the strength and scalability of its business model. The company achieved a 31% year-over-year increase in revenue, reaching $80.1 million, driven by an 18% growth in Monthly Transacting Members (MTMs) and an 11% increase in Average Revenue Per User (ARPU). These figures highlight Dave’s ability to expand its user base while enhancing user engagement, contributing to its strong revenue performance.
Additionally, the company’s adjusted EBITDA also reached record levels, underscoring its operational efficiency and effective cost management. Dave’s non-GAAP variable profit surged by 57% year-over-year to $51.8 million, representing a 65% margin relative to GAAP revenue, up approximately 1,100 basis points from the same period last year. This significant margin expansion was supported by continued optimization of its AI-powered underwriting engine, which has processed over 105 million unique ExtraCash transactions since its inception.
Furthermore, Dave Inc. (NASDAQ:DAVE) credit performance showed resilience, with a 28% improvement in its 28-day delinquency rate compared to the previous year, reaching 2.03%. The company also recorded a reduction in credit loss provisions, which decreased approximately 9% year-over-year, despite a 37% growth in ExtraCash originations. This improvement reflects the effectiveness of its risk management strategies and its focus on maintaining a healthy balance sheet.
Given its strong financial performance, innovative product offerings, and focus on sustainable growth, Dave Inc. (NASDAQ:DAVE) presents a compelling investment opportunity for those looking to add a high-potential small-cap stock to their portfolio.
Overall, DAVE ranks 7th on our list of small cap stocks with high potential. While we acknowledge the potential of DAVE to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DAVE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.