The Federal Reserve slashed interest rates by a half point in September, kickstarting its first easing campaign in four years. It was the first interest rate cut since the early days of the Covid-19 pandemic. Rate cuts are considered broadly supportive of stocks, provided the economy is not in recession. Since the risk of recession in the US economy has been overruled, small-cap stocks are likely to benefit more from the rate cuts than their large-cap peers due to easing monetary policy. This is primarily because they are thought to be more likely to hold floating-rate debt.
However, Oxford Economics analysts noted that small-cap stocks’ performance has given mixed signals since the previous interest rate cuts. At best, rate cuts have helped moderate small caps’ underperformance compared to large caps in the late tightening cycle stages.
But this time can be different. Analysts at Oxford expect small caps to be “outsized beneficiaries of the upcoming rate cuts…due to their relatively weak balance sheets.” Several factors are likely to alleviate the small caps’ balance sheet pressure, including easier economic conditions, resilient business and consumer spending, and reduced borrowing costs.
Generational Opportunity for Small to Mid-Cap Stocks
On October 4, Eduardo Lecubarri, managing director and global head of small and mid-cap equity strategy at J.P. Morgan, talked about the potential of investing in small to mid-cap stocks in an interview on CNBC. He breaks down the opportunities in the space, while shedding light on how to pick the right stocks in what he calls a “generational opportunity.” He says that we are living in a tricky world where the opportunity to invest lies in realizing the hidden value in the small and mid-cap sector and picking the right stocks instead of investing broadly.
He claims that times have changed, with small and mid-caps stocks going from being not the most suitable investment in previous years to paving the way for the biggest opportunity in the sector in the past 2-3 decades. He further elaborated and said that the opportunity of picking a small to mid-cap versus large-cap stock is bigger now than he has ever seen in the past 30 years. This generational opportunity, however, is not without its pitfalls for those who fail to make the right picks.
Pricing power and high-margin businesses can be suitable indicators of the right small to mid-cap stocks to invest in, according to Lecubarri. The need to find value and invest in stocks with achievable earnings growth expectations also holds pivotal value in making the right choices. While 2022 to 2023 was the time to stay away from small to mid-cap stocks, Eduardo Lecubarri says that times have changed with the stabilizing economy.
Our Methodology
For this article, we used stock screeners to identify around 30 penny stocks under $5 with a market cap over $500 million and with high analyst upside potential, as of 6 October, 2024. We also considered the number of hedge fund holders as of Q2 2024. The stocks are listed in ascending order of their upside potential.
Why are we interested in 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).
8 Penny Stocks with Biggest Upside Potential According to Analysts
8 Penny Stocks with Biggest Upside Potential According to Analysts
Opthea (NASDAQ:OPT) is a clinical-stage biopharmaceutical company based in Australia. It develops novel therapies to address the gaps in treating progressive and prevalent retinal diseases, including diabetic macular edema (DME) and wet age-related macular degeneration (wet AMD). The company’s lead product candidate is sozinibercept (OPT-302). It is under evaluation in two pivotal Phase 3 clinical trials for its use in combination with standard-of-care anti-VEGF-A monotherapies for treating DME and wet AMD.
The company has also manufactured OPT-302 for use in Phase III clinical trials. It supports the commercialization of the product through various activities and has expanded its US-based management team to facilitate the execution and oversight of its Phase III program. Opthea’s (NASDAQ:OPT) development activities are based on an intellectual property portfolio covering key targets, including vascular endothelial growth factors VEGF-C, VEGF-D, and VEGF Receptor-3.
The company made substantial progress in advancing sozinibercept’s Phase 3 wet AMD program in fiscal 2024. It completed enrollment enrollment in both COAST and ShORe pivotal trials that evaluated the superiority of sozinibercept combination therapy. In addition, the company is strengthening its balance sheet with around $300 million in financial proceeds. It is expecting to use its existing cash and cash equivalents to fund the anticipated topline data readouts of COAST in early Q2 in calendar year 2025 and ShORe in mid-calendar year 2025.
These funds will also help the company go through the Biologics License Application (BLA) preparations for FDA approval, progress Chemistry, Manufacturing, and Controls (CMC) activities, and prepare the organization for a potential launch of sozinibercept in wet AMD.
Overall, OPT ranks EIGHTH among the 8 penny stocks with the biggest upside potential according to analysts. While we acknowledge the potential of OPT as an investment, our conviction lies in the belief that 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 OPT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
