3 Small-Cap Stocks to Watch in the Coming Quarters

Key Points

• As the market rotation gets underway, small-cap stocks are becoming more and more attractive for some on Wall Street. 
• Three companies stand out as potential double-digit upside plays, backed by financial and fundamental tailwinds. 
• Wall Street analysts see double-digit EPS growth and price targets to match.

Investors are still hanging onto the momentum of some sectors in the stock market today, namely those in the technology sector dealing with the global adoption of artificial intelligence. However, some in the market feel like better opportunities in other areas are beginning to gain more bullish momentum, a rotation with a high acceptance rate.

Stanley Druckenmiller is a Wall Street figure already taking on this rotation. He chose to sell out of the chip and semiconductor names in the market and then reallocate into areas like small-cap stocks and bonds. To put on his view, Druckenmiller decided to buy into the iShares Russell 2000 ETF NYSEARCA: IWM and the iShares 20+ Year Treasury Bond ETF NASDAQ: TLT.

Investors who can potentially select individual stocks rather than diversified funds can get a leg up on the market by considering small-cap stocks like Cross Country Healthcare Inc. NASDAQ: CCRN, Denny’s Co. NASDAQ: DENN, and even ZipRecruiter Inc. NASDAQ: ZIP to potentially build a portfolio that could outperform the market in the coming quarters, backed by fundamental factors and tailwinds.

Cross Country Healthcare Benefits from Steady Hiring Trends in Healthcare

The Federal Reserve is holding the promise of cutting interest rates over the head of the market, with an over 90% probability (according to the CME’s FedWatch tool) of cuts coming by September 2024, driven by the rising trend in unemployment.

Reaching an unemployment rate of over 4.1% in the United States is historically the point at which the Fed considers cutting rates, which is a good thing for most. However, in the middle of this rise in unemployment, one sector is still keeping its hiring flows strong.

The healthcare sector added up to 48,600 jobs in the past month, while the economy added 206,000 jobs over the month. Representing 23.5% of total employment is significant, but there is one stock analysts now recommend due to this trend.

Cross Country is a healthcare staffing company, so as long as there is a need for nurses, this stock will see better financials. Wall Street analysts now forecast up to 39.7% earnings per share (EPS) growth for the next 12 months, giving others the evidence they need to value the stock higher.

Those at Barrington Research saw fit to value Cross Country Healthcare stock at $21 a share, calling for a 26.5% upside from its current level, which is only 62% of its 52-week high.

Why Denny's Balance Sheet Supports Double-Digit Upside

With the prospect of lower interest rates on the horizon, small-cap stocks that carry just a little bit more debt on their balance sheets will benefit the most. Low interest rates on debt translate into lower interest expenses, which is good for EPS.

Denny’s balance sheet shows that over 90% of the balance sheet is made out of debt, so investors can imagine how beneficial lower interest rates will be for the future earning power of the company. Wall Street analysts agree with this trend, as they now forecast up to 11.5% EPS growth in the next 12 months.

Leaning on these projections, Benchmark saw fit to place a valuation of $15 a share for Denny’s stock today, daring it to rally by as much as 100% from today’s stock price. These aren’t the only ones on Wall Street who have accepted the future potential for Denny’s stock.

Up to $36.1 million of institutional capital made its way into Denny’s stock over the past 12 months, bringing the company’s institutional ownership rate up to 85.1% for a stamp of quality acceptance from Wall Street’s money managers.

ZipRecruiter's Path to Higher Highs on Employment Recovery

The same trends that will help Cross Country Healthcare stock will be the same ones to support an online employment platform like ZipRecruiter to see more financial momentum ahead. When and if the Fed lowers interest rates in the face of high inflation and unemployment, employment prospects could be due for a recovery.

Because most job seekers go to places like LinkedIn and ZipRecruiter to find the next steps in their careers, Wall Street analysts have taken this view public. The consensus price target set for ZipRecruiter stock is now $12.4 a share, which implies a net upside of 40.1%.

Amplifying this view was the Vanguard Group, which boosted its stake in ZipRecruiter stock by 11.9% as a vote of confidence. This boost made the asset manager’s net investment reach $113.6 million today.

Riding on the lower interest expense benefit, ZipRecruiter’s balance sheet shows that 97.8% of capital is made of debt. Knowing that lower expenses will lead to higher EPS, analyst ratings and institutional buying could be justified.