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There has been a noticeable shift in the stock market over the last two months. Investors are moving away from former high-flying large- and mega-cap stocks into discounted small-cap names that the bull market has left behind.
Since July 1, the Russell 2000 index of small-cap stocks is up over 9% while the S&P 500 index is up just 3%. It was a transition bound to happen.
In their book Investing in Small Cap Stocks, authors Christopher Graja and Elizabeth Ungar found that over the 75-year period studied, small-cap stocks beat mid-cap and large-cap stocks 60% of the time.
These smaller companies have lagged their larger brethren over the last five years by nearly two-to-one. The reasons are not surprising. High interest rates and high inflation hurt small caps more than bigger companies. Without the same access to financial resources, small caps are forced to borrow money at higher rates, leaving less room for business investment.
The promise of interest rate cuts and lower inflation rates creates prime opportunities for small-cap stocks to shine once more. Bank of America ( NYSE:BAC ) analysts identified the three small caps below as stocks that should see their stock prices nearly double in the next year. One of them is forecast to quadruple in value.
Key Points About This Article:
- Small-cap stocks have significantly lagged behind their larger peers as they faced the twin enemies of growth: high interest rates and high inflation.
- Analysts think the three deeply discounted stocks below have an outsized chance of substantial capital appreciation just as a rotation into small-cap stocks begins in earnest.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report . It features a software stock we’re confident has 10X potential.
Origin Materials (ORGN)
Blue and clear plastic bottles
Sustainable packaging materials manufacturer Origin Materials (NASDAQ:ORGN) could change the way plastic bottles are recycled. It has made the world's first commercially scalable plastic bottle caps made 100% from polyethylene terephthalate (PET), the most recyclable and recycled plastic in the U.S. The traditional bottle cap is made from high-density polyethylene (HDPE) or polypropylene (PP). A PET cap makes for greater recyclability.
Origin also developed a "tethered" PET cap to meet new EU standards that go into effect later this year. The tethered caps are designed to remain connected to the bottle to improve their collection for recycling.
When Origin Materials announced second-quarter earnings last month, it also said it had signed its first major customer that will have it delivering billions of PET caps over the initial two-year run of the contract. It expects to generate over $100 million in sales for the term beginning in early 2025.
Bank of America upgraded ORGN stock from neutral to buy and hiked its one-year price target from $1.35 per share to $3.00 per share. Shares go for $1.58 per share today, implying 90% upside, but could go higher If more customers sign on.
Five9 (FIVN)
Woman looking at a computer screen
Contact center cloud software provider Five9 ( NASDAQ:FIVN ) got a big upgrade from Bank of America analysts who lifted the stock from a sell to buy rating while reiterating a $63 per share price target.
The reason behind the double upgrade of Five9 stock is based on the market already pricing in the competitive and market-related threats the tech company faces while artificial intelligence could provide its business with substantial near- and long-term tailwinds. Believing the bearish outlook has "run its course," BoA sees a near doubling of the stock from current levels.
Unfortunately for Five9 investors, the market disagrees. The analyst changed its outlook in early August ahead of the software stock's second-quarter earnings report, but following the release of its financial statements, Five9 stock tumbled 26%. It hasn't made up much lost ground since.
Yet Bank of America isn't alone in seeing more upside in the stock. Its price target is in line with the consensus view. The high side sees a price of $90 per share, but that was set last December by Deutsche Bank ( NYSE:DB ) and hasn't been updated since. Most other analysts significantly downgraded their price targets since then.
Editas Medicine (EDIT)
Lab technician testing a specimen
One of Bank of America's biggest potential gainers is Editas Medicine ( NASDAQ:EDIT ), a clinical-stage gene-editing company using CRISPR technology. BAC assigned a $15 per share one-year price target.
The biotech continues to show progress with reni-cel, a CRISPR gene-edited cell therapy for sickle cell disease (SCD) and transfusion-dependent thalassemia (TDT). According to Inside Precision Medicine, reni-cel employs an RNA-guided editor that makes it the first experimental Cas12a gene-edited cell therapy medicine. It also targets the HBG1/2 promoter genes. These make it significantly different from Vertex Therapeutics ( NASDAQ:VRTX ) Casgevy, which is currently the only FDA-approved CRISPR-based gene-editing treatment.
Editas Medicine reports there have been few side-effects in patients using reni-cel treatments and they have remained transfusion free more than a year afterward.
Bank of America raised its outlook for FDA approval of reni-cel from 50% to 60%, possibly as soon as 2026. EDIT stock, however, has responded mostly like Five9's, continuing a long slide lower. Shares are now down 63% year-to-date, giving Editas Medicine 301% upside potential from its current price of $3.74 per share.
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