Small-cap stocks have taken a beating in the last two years. After the meme stock craze of 2021 died down, investors found they could get more predictable thrills from large-cap technology stocks. But the tide is beginning to turn. The Russell 2000 index, which is largely regarded as the small-cap index, is up 9% in 2024, and 8% in the last 30 days. That means it’s time for bargain hunters to look for small-cap stocks at 52-week lows.
This is part of the sector rotation that’s happening in anticipation of lower interest rates. In many cases, companies with market capitalizations of less than $2 billion are more sensitive to rising interest rates. But with interest rates likely to start moving lower, perhaps as early as September, it’s a good time for risk-tolerant investors to look for small-cap stocks to buy.
However, even with small-cap stocks at 52-week lows, you need to be discerning. The stocks listed below are those of companies that have a leadership position in their sectors, and in some cases, those sectors are part of the emerging AI economy.
IonQ (IONQ)
IonQ (NYSE:IONQ) is a leader in the emerging sector of quantum computing. The reason investors should be looking at IonQ as one of the small-cap stocks at 52-week lows is the role quantum computing will play with artificial intelligence.
AI applications require vast amounts of data and the ability to process that information quickly. The benefit of quantum computers is that they can perform tasks much faster than classical computers, which makes them ideal for the demands of AI.
As tantalizing as that may sound, investors need to remember that IonQ is a tiny company with a market cap of around $1.6 billion. It generates little revenue and profitability will take time. That’s why IONQ stock is down more than 38% this year.
Nevertheless, trading for less than $10 per share, this could be a good time to start a position in IONQ stock. At this point, institutional investors own only about 41% of the stock.
Schrodinger (SDGR)
Schrodinger (NASDAQ:SDGR) is a software and drug discovery company that may play a critical role in the gene editing sector. The company offers a physics-based computational model that helps discover new molecules and helps companies such as CRISPR Therapeutics (NASDAQ:CRSP) understand if those molecules will become successful treatments.
This is precisely the kind of application that companies are looking for as they rationalize the spending required to create AI applications. The last piece of the puzzle is affordability.
Declining revenue has caused SDGR stock to drop 37% in 2024. The company is not yet profitable and it’s burning cash, which is common for young companies. However, the software side of the company’s business is showing the fastest growth. And lower interest rates should increase Schrodinger’s addressable audience.
That’s one reason analysts project the company’s net losses to be cut in half in the next 12 months. Eight out of 11 analysts give SDGR stock a strong buy rating with a price target of $34.82 which is 59% higher than its closing price on July 24, 2024.
Dave & Buster’s Entertainment (PLAY)
Restaurant stocks have been under pressure in 2024 as inflation continues to weigh on consumers. But a company like Dave & Buster’s Entertainment (NASDAQ:PLAY), has been holding up decently with revenue well above pre-pandemic levels.
Still, PLAY stock is trading below 2019 levels. But that may be where the opportunity lies. Dave & Buster’s is more than just a restaurant. It’s a grown-up arcade. And through a new partnership with Lucra, the company will be offering its loyalty members the chance to place small bets on arcade games.
Bears can point to the fact that the company relies on discretionary dollars, which have been drying up. But those dollars may be more forthcoming if the Federal Reserve lowers interest rates.
That expectation may be why analysts expect earnings to increase by 28%. If that’s the case it would support a $62.43 price target which is 76% above its closing price on July 24.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.