Top 3 Small Cap Stocks Emerging as Rotation Winners

Key Points

• Investors should investigate the new market preferences to spot opportunities as the new market rotation gets underway.
• Among the new sectors this rotation favors are small-cap stocks, but not all are created equal; three stand out from the pack. 
• Fundamental tailwinds boost these stocks to command more optimistic Wall Street perceptions for growth and upside.

Investors who remained heavily invested in the technology sector should start watching the broader market’s behavior today, as names in artificial intelligence like NVIDIA Co. NASDAQ: NVDA are potentially coming out of favor. A rotation into other areas and asset classes has started in the past couple of weeks, and riding the momentum could prove beneficial for most today.

At the helm of the new market preference are stocks that historically have benefitted from a lower interest rate environment, and that has been the theme to start the summer. As the Federal Reserve promises to cut interest rates before 2024 ends, markets have been readying their capital rotation to reflect what now seems to be a priced-in reality.

The newly favored corners of the financial markets would include bonds, as lower interest rates would cause their prices to go up, and small-cap stocks, as smaller businesses typically rely on cheaper and flexible financing to get their growth strategies underway. Knowing this, investors should watch out for Groupon Inc. NASDAQ: GRPN, Lovesac Co. NASDAQ: LOVE, and LendingClub Co. NYSE: LC, as they each carry fundamental merit beyond today’s rotation.

Consumers Hit by Inflation Find Hope in Groupon Stock

Acting as a platform that connects consumers and merchants, with a discount coupon in between, sounds like the perfect business model considering the higher levels of inflation experienced in the U.S. Economy today. Because of this fundamental fact, the stock has done well in the past few months.

Now trading within 10% of its 52-week high, investors can safely assume that bullish momentum favors Groupon stock. However, the evidence doesn’t stop there. Other metrics show investors why taking a second look at this company might be worth it.

For starters, Wall Street analysts forecast up to 50% earnings per share (EPS) growth in the next 12 months, which is reason enough for the stock to be trading this close to a new 52-week high. More than that, analysts at Northland Capmk initiated coverage on Groupon stock with a “Strong Buy” rating and a price target of $22 a share.

Groupon stock would need to rally by 25.7% from where it trades today to prove these targets right. Staring at double-digit upside potential, Mirae Asset Global Investments increased its stake in Groupon stock by 10.4% as of June 2024, bringing its net investment up to $1.3 million.

Homebuyer Demand Could Drive Up Potential for Lovesac Stock

Lower interest rates come with lower mortgage rates, which is good news for would-be homebuyers currently waiting on the sidelines to finally lock in a more reasonable rate on their mortgage (which is more than double the pandemic lows).

Logically speaking, when a new home is bought, the next best thing to do is to furnish it, and that’s where Lovesac stock comes into play. Facing this upcoming demand in homebuyers has led Wall Street analysts to forecast up to 60.5% EPS growth this year.

As these projections became more realistic, others on Wall Street decided to make their optimistic views public as well. Those at the Maxim Group decided to slap a $38 a share valuation on Lovesac stock, daring it to rally by 37.6% from today’s prices, enough of a potential prize to draw in buyers.

Among the $52.2 million in institutional capital that made its way into Lovesac stock over the past 12 months, Granahan Investment Management (Lovesac’s largest shareholder) boosted their positions by 15% well before the rotation started, a position that translates to $39.8 million in capital.

Alternative Finance Demand Boosts LendingClub Stock

When the banking stocks of the United States reported their second quarter 2024 earnings results, they all quoted higher credit card delinquency rates. Given that consumers are cash-strapped due to inflation, it shouldn’t come as a surprise to see these figures go up.

LendingClub offers alternative financing solutions, such as personal loans, loans based on collateral, and even unsecured loans. Just like Groupon, this stock provides a beacon of hope for consumers looking to weather the inflation storm today. This fundamental trend was enough to justify Wall Street’s EPS growth forecasts of over 122% for the next 12 months.

As bold as these predictions may be, Jefferies Financial Group thought they made sense. They recently (as of July 2024) boosted their price targets on LendingClub stock to $12 a share, roughly a 13.2% upside from today’s price.

Considering the stock now trades within 10% of its 52-week high, other analysts could take advantage of the bullish momentum and rate it accordingly.

Finding LendingClub’s thesis sound, the Vanguard Group decided to allocate 1.6% more to the stock, bringing their net investment up to $100.6 million today, or 10.3% ownership of the entire company.