Small-cap stocks are often favored by investors for their outsized growth potential, but the group has struggled this year. The benchmark Russell 2000 Index (RUT) is only up about 3% for 2023, compared to a gain of more than 18% for the S&P 500 Index ($SPX).
High interest rates and inflationary pressures have created a tough environment for small-cap stocks this year, but as these pressures begin to ease next year, the Russell 2000 could see a revival. Against this backdrop, it's worth taking a look at some names that could be set for major upside in the year ahead, according to analysts. Here are the highlights on three top-rated small-cap stock picks.
Gulfport Energy: Fueling Growth with Natural Gas
Valued at $2.46 billion, Gulfport Energy Corporation (GPOR) is an Oklahoma-based oil and gas company with assets in the Appalachia and Anadarko Basins, as well as the Utica Shale. The stock has been killing it in 2023, up more than 80% since the start of the year.
With a forward P/E ratio of 8.16, the outperforming energy stock is still priced at a discount relative to many of its peers.
In its most recent quarterly earnings report, GPOR's adjusted EPS of $3.43 comfortably surpassed analysts' expectations, even as revenue of $266.67 million fell short. Looking ahead, analysts are targeting 28% earnings growth for fiscal 2024.
Analysts are unanimous in their endorsement, with all six giving GPOR a “strong buy" rating. The mean target price is $151.83, signaling about 14% upside from the current price.
International Game Technology: A Gamble on Gaming Innovation
International Game Technology (IGT), headquartered in Las Vegas, is a big player in gambling. Their diverse lineup includes lottery services, gaming hardware and services, and online sports betting.
The stock is up 22.5% in 2023, easily outpacing the small-cap focused Russell 2000.
IGT has beaten earnings estimates for four quarters straight. In the most recent quarterly report, adjusted EPS of $0.52 and revenue of $1.07 billion both comfortably beat Wall Street's expectations.
Analysts are expecting continued EPS growth in fiscal 2024, with the consensus calling for 0.55%. At 13.66x forward earnings, the stock is fairly priced relative to its peers. IGT also offers a dividend, with the current yield at 3%.
Analysts are cheering for IGT, with all four in coverage giving the stock a “strong buy” rating. The mean target price is $38.50, indicating expected 41.7% upside from the current price.
Redwood Trust: Building Returns in Real Estate Finance
Redwood Trust (RWT) is a real estate investment trust (REIT), with a particular focus on mortgage-backed assets. Like all REITs, the stock offers a generous dividend, with the current yield at 11.5%.
Many REITs have come under pressure due to the challenging macro environment this year, but RWT is besting the broader RUT with a 10.2% gain for 2023.
RWT missed expectations with its most recent earnings report, falling short on both the top and bottom lines. However, analysts are targeting 36% EPS growth for 2024, and the price/book value of 0.77 suggests Redwood Trust is trading at a discount.
Analysts are giving RWT a nod, with five out of nine shouting "strong buy," one saying "moderate buy," and three recommending “hold.” The mean target price is $8.31, suggesting a cool 21.3% upside from current levels.
