While Big Tech stocks have led the market rally on the back of surging artificial intelligence (AI) adoption, recent data - including a tamer-than-expected consumer price index (CPI) report for June - sparked renewed buying interest in parts of the market that were previously underappreciated. Small-cap stocks, in particular, have captured newfound investor interest, as investors look to broaden out from the once-dominant Big Tech stocks.
Tom Lee, head of research at Fundstrat, is bullish on small caps, with the analyst forecasting a sustained rally totaling almost 50% in 2024. Among the various drivers for small-caps, Lee cites a high probability of a Fed rate cut this fall, improving sentiment toward regional banks, and narrowing risk premiums on small-cap debt, which indicates rising investor confidence. With all of these factors aligning, Lee believes that small-caps offer the "most compelling near-term investment case."
Given the promising outlook for small caps, now might be the perfect time to explore two under-the-radar “Strong Buy”-rated gems - Tarsus Pharmaceuticals, Inc. (TARS) and Intuitive Machines, Inc. (LUNR). Analysts predict that both of these names could more than double from current levels, presenting a significant growth opportunity for investors seeking substantial gains.
Small-Cap Stock #1: Tarsus Pharmaceuticals
California-based Tarsus Pharmaceuticals, Inc. (TARS) is a trailblazing biopharmaceutical company revolutionizing eye care. Since its inception in 2016, Tarsus has been at the forefront of developing novel therapeutics. The company is best known for its flagship product, XDEMVY, the first and only FDA-approved treatment for blepharitis caused by Demodex mites and meibomian gland disease.
Beyond eye care, Tarsus is expanding its innovative pipeline to tackle unmet needs in dermatology and infectious disease prevention. Valued at $1 billion by market cap, shares of Tarsus have rallied almost 34.5% over the past 52 weeks and 33.5% on a YTD basis, outperforming the broader S&P 500 Index’s ($SPX) respective gains of 20.6% and 15.4% during these time frames.
On May 8, Tarsus reported its Q1 earnings results, which blew past Wall Street’s projections on both top and bottom lines. The company posted revenue of $27.6 million, smashing Street estimates by a solid 54.3% margin. This stellar performance was primarily fueled by the successful launch of the company’s flagship product, XDEMVY, which generated $24.7 million to account for nearly 89.5% of total revenue.
Tarsus is making significant strides with XDEMVY, expanding payer coverage and securing major contracts that place XDEMVY on preferred status for 18 million covered lives, with benefits set to kick in by Q2 of fiscal 2024. During the quarter, the biopharma company delivered about 26,000 bottles of XDEMVY, marking a 65% surge from Q4 of fiscal 2023.
Plus, as of May 3, over 8,000 eye care professionals (ECPs) have embraced XDEMVY, with more than half prescribing it to multiple patients, underscoring the strong market traction for this product.
Tarsus incurred a loss per share of $1.01 in Q1, which was narrower than Wall Street’s estimated loss per share of $1.15. At the end of the quarter, Tarsus had approximately $298.5 million in cash, cash equivalents, and marketable securities.
Although the company did not provide formal guidance, management indicated during the Q1 earnings call that total operating expenses for Q2 are expected to remain on par with Q1 levels. Looking ahead to the latter half of the year, operating expenses are projected to increase due to the expansion of the sales force, which is set to be fully deployed by the end of Q3, as well as potential new initiatives targeting ECPs in Q4.
Analysts tracking Tarsus Pharmaceuticals project its loss to narrow 19.3% year over year in fiscal 2024, and shrink by another 42.6% in fiscal 2025.
TARS stock has a consensus “Strong Buy” rating overall. Of the nine analysts covering the stock, eight suggest a “Strong Buy,” and the remaining one gives a “Hold” rating.
The average analyst price target of $55.67 for TARS indicates expected upside potential of 105.1% from the current price levels.
Small-Cap Stock #2: Intuitive Machines
With a market cap of $246.4 million, Texas-based Intuitive Machines, Inc. (LUNR) is revolutionizing lunar exploration and access with its diversified space exploration, infrastructure, and services. The space company excels in four key areas: Lunar Access Services, Orbital Services, Lunar Data Services, and Space Products and Infrastructure.
Shares of this lunar exploration company were in focus earlier this year amid the successful landing of its Nova-C class lunar lander “Odysseus” on the moon in February, marking the first of its kind in over 50 years.
The stock has now pulled back 68.2% from its February highs of $13.25, and is down about 50.5% over the last 52 weeks. On a YTD basis, LUNR is up 64.8%.
LUNR reported its Q1 earnings results on May 14, which sailed past Wall Street’s top-line predictions by a 30.7% margin. During the quarter, the company achieved record revenue of $73.1 million, marking a staggering 300% surge from the year-ago quarter, driven primarily by OMES III and NASA Commercial Lunar Payload Services (CLPS) initiative contracts.
Also during Q1, the company registered a negative free cash flow of $8 million and a negative adjusted EBITDA of $1.1 million, which reflected a significant turnaround from the $27.2 million in negative free cash flow and $13.5 million negative adjusted EBITDA recorded in the same period last year.
Despite its loss of $120.7 million in Q1, LUNR managed to cut cash used from operations by $12.2 million, and closed the quarter with a cash balance of $55.2 million - the largest quarter-end balance since the company’s inception.
Looking forward to fiscal 2024, management anticipates revenue to range between $200 million and $240 million, representing a 2.5x to 3x increase from last year’s sales. Plus, management expects the Q1 cash balance to comfortably fund operations throughout the year, with extra cash reserves anticipated from forthcoming wins and growth strategies.
Analysts tracking Intuitive Machines project the company’s profit to climb a remarkable 140.5% year over year to $0.30 in fiscal 2024.
Overall, analysts' view on LUNR stock is bullish, with a unanimous "Strong Buy" rating from all five in coverage.
The average analyst price target of $9.80 for LUNR indicates an expected upside potential of 132.8% from the current price levels.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
