Trump Bump And Rate Cuts: 5 Small-Caps Set To Surge

Trump Bump for Small-Caps

The twin forces of the Federal Reserve’s monetary pivot and President Trump’s election victory have caused small-cap stocks to surge to an all-time high in recent weeks. I wrote about small-caps back in September, when the Fed’s rate cut sparked the initial rally. Since publication, the stocks I selected have collectively returned 20.65%, outperforming both the Russell 2000, the benchmark index for smaller companies, and the S&P 500. Four out of five stocks have delivered double-digit returns, with one selection returning over 50%.

Rate Cut Winners: Top 5 Small-Caps Ready For A Rally Performance (September 25-November 21, 2024)

Lower rates typically benefit small-cap stocks for the following key reasons:

• Cheaper borrowing costs: Small-caps typically have less access to cheap credit than large-caps. When rates fall, borrowing costs decrease and this can have a positive effect on profitability for smaller companies, improving their fundamentals.
• Risk-on catalyst: When rates fall, yields on fixed income investments also decline. This can incentivize investors to seek higher returns by moving into riskier assets like small-caps, which can drive up prices.
• Growth potential: One advantage of small-caps is that they typically have “more room to run,” meaning that they are in earlier stages and have more capacity to grow relative to large-caps. With cheaper financing, small-caps can fund expansion more easily, potentially accelerating their growth and upside for investors.

Immediately following the election result, the Russell 2000 jumped over 5%, and while small-caps have lost some of their gains, they are still outpacing large-cap stocks on a trailing one-month basis.

iShares Russell 2000 ETF (IWM) vs. S&P 500 (SP500) 1-month Trading Chart

Trump’s election is thought to have amplified the small-cap rally, based on expectations that his policies will favor smaller companies. Promised regulatory rollbacks could disproportionately benefit small firms, and “America First” tariff policies align with small-caps’ domestic focus. Additionally, corporate tax reform could help small-caps since they generally pay higher effective tax rates.

The data below helps explain the Russell 2000s rally in the aftermath of the presidential election and subsequent Federal Reserve interest rate cut. Compared to the S&P 500, a much higher share of total outstanding debt-excluding financials-is tied to floating rates.

This can make small-caps relatively more sensitive to shifts in U.S. monetary policy. Using data since 2023, once the 10-Year Treasury Yield rallied at least 3% in a given week, the Russell 2000 tended to see increasingly negative performance.

Recently, Federal Reserve Chair Jerome Powell noted that the impact of fiscal policy under the incoming Trump Administration was not factored into their equation. This may open the door for markets to continue pricing out prior hawkish expectations, offering near-term Russell support.

Given the possibility for accommodative policy under a Trump administration and the potential for further rate cuts, a sustained rotation into small-caps is one potential investment narrative we could see unfolding in 2025. Furthermore, given the recent modest pullback in small-caps, now could be an attractive entry point for investors with conviction in the sector.

Top 5 Small-Cap Stocks to Buy on the Dip

The five small-cap stocks selected each have solid momentum and a strong record of growth in sales and profits. SA Quant aimed to provide a blend of sectors in addition to the above criteria, so this list does not directly mirror the top small-cap stock screener available to SA premium subscribers. Rather, the below top five small-caps provide a more tailored selection of stocks. The stocks below also experienced a recent pullback or have leveled off following the immediate gains small-caps made post-election. Users can customize their own screeners based on the “Advanced Filters” field in a given stock screener to tailor the list to their liking.

1. OppFi Inc. (OPFI)

• Sector: Financials
• Market Capitalization: $595.74M
• Quant Sector Ranking (as of 11/20/2024): 3 out of 686
• Quant Industry Ranking (as of 11/20/2024): 1 out of 39
• Quant Rating: Strong Buy

OPFI is a top Quant-ranked Consumer Finance company that provides credit access to under-served middle-income consumers. Powered by AI-driven underwriting, OPFI leverages its scalable tech platform and bank partnership model to improve unit economics while reducing regulatory risk. The company delivered exceptional Q32024 earnings results, with revenue reaching a new high of $136M, while GAAP net income more than doubled Y/Y.

OppFi’s exceptional growth has translated to key profitability metrics, like its TTM ROE OF 32% and $311.86M in cash from operations, which are +209% and +124% improvements versus the sector, respectively. The company is also trading at heavily discounted valuation metrics, despite its ‘A+’ momentum grade like its FWD P/E GAAP of 7.9x versus the Financial sector’s 13.6x.

OPFI Valuation Grade

OPFI is positioning itself as a broader digital financial services platform, evidenced by its investment in small business lender Bitty. With solid fundamentals and positive timeliness indicators like EPS revisions and price momentum, OPFI is a small-cap poised for further upside potential, should the sector experience a sustained rally.

2. Northeast Community Bancorp, Inc. (NECB)

• Sector: Financials
• Market Capitalization: $345.98M
• Quant Sector Ranking (as of 11/20/2024): 20 out of 686
• Quant Industry Ranking (as of 11/20/2024): 2 out of 253
• Quant Rating: Strong Buy

Since we last covered NECB, the company slid only one position to the number # 2 Quant-rated Regional Bank stock, while its overall factor profile has improved. The company’s profitability grade has improved from a ‘C+’ back in September to its current ‘B-‘, supported by an 8% increase in net income quarter-on-quarter. NECB’s loan portfolio, which is focused on lending to construction businesses, continues to drive performance.

“We are pleased to report another quarter of strong earnings due to the strong performance of our loan portfolio. Despite the challenging high interest rate environment during 2023 that continued into most of 2024, offset by a reduction in interest rates towards the end of the third quarter of 2024, loan demand remained strong with originations and outstanding commitments remaining robust. As has been in the past, construction lending in high demand-high absorption areas continues to be our focus,” said Chairman and CEO Kenneth Martinek.

NECB has an A+ growth grade, with highlights including 12% year-on-year revenue growth and 21% forward-looking EPS growth, which are 175% and 475% increases to the sector median, respectively. The stock has displayed exceptional price momentum over the last year, returning 76% and nearly 36% in just the last three months.

NECB Momentum Grade

NECB’s incredible gains have somewhat eroded the stock’s overall valuation profile.However it is still trading at a significant discount in terms of its FWD P/E, which is 8.2x versus the financial sector’s 13x, and its TTM PEG of 0.3x, which is a 61% discount relative to the sector median. NECB’s combination of profitable growth, sustained momentum, and value that is in line with the sector make it an attractive small-cap selection in the current environment.

3. DXP Enterprises, Inc. (DXPE)

• Sector: Industrials
• Market Capitalization: $1.07B
• Quant Sector Ranking (as of 11/20/2024): 15 out of 617
• Quant Industry Ranking (as of 11/20/2024): 1 out of 42
• Quant Rating: Strong Buy

DXPE is a Houston-based industrial distributor that primarily supplies the energy, industrial, and manufacturing sectors with equipment and servicing to keep their operations running. The company’s largest division is its Service Centers segment, which sells pumps, bearings, and power transmission products, as well as maintenance and repair services to industrial customers through its service centers. Acquisitions have been central to the company’s growth strategy since the 1980s, and DXPE is deliberately prioritizing growth over maximizing short-term margins.

” If you noticed, SG&A was probably as a percent of sales was a little high. And so we are – I think it’s important to note that we are not trying to manage the business to maximize profits at the expense of sales and that – in quite the opposite, we have a lot of bets on the table to grow sales,” said David Little, Chairman and Chief Executive Officer of DXPE.

This approach is reflected in the company’s overall factor grades, with DXPE’s ‘A-‘ growth grade supported by key highlights such as year-over-year EPS GAAP growth of 45%, which is an incredible 381% increase vs. the sector. While profitability has somewhat come at the expense of the company’s tremendous growth, DXPE still displays encouraging profitability metrics; TTM ROE stands at 17%, which is 29% above the broader industrial sector. The company has displayed exceptional price momentum, delivering 121% on a trailing one-year basis, which outpaces the broader industrial sector, which has returned just 31% in the same period.

DXPE Momentum Grade

Despite DXPE’s remarkable momentum in the last year, the company retains attractive valuation characteristics with highlights including a FWD P/E of 16.8x vs. the sector’s 20.7x and a TTM EV/Sales of 0.93x, which is a -54% reduction compared to the industrials sector. The company delivered strong earnings in Q3, beating expectations by $0.48 and revenue by $29.94M. DXP Enterprises offers investors exposure to a diversified industrial product and services portfolio, with excellent fundamentals, and a proven track record of growth via acquisitions that could drive further gains for investors.

4. Virco Mfg. Corporation (VIRC)

• Sector: Industrials
• Market Capitalization: $247.60M
• Quant Sector Ranking (as of 11/20/2024): 31 out of 617
• Quant Industry Ranking (as of 11/20/2024): 2 out of 11
• Quant Rating: Strong Buy

Virco is a leading manufacturer and supplier of educational furniture and equipment for K-12 schools in the US. Virco was among the top 20 Quant-rated Small-Cap stocks in September, and is currently the #2 Quant-rated Office Service and Supplies stock. The company has benefited from lingering supply chain disruptions from COVID-19, which has allowed for faster delivery from this US-based company, giving it a strong competitive advantage over foreign suppliers. VIRC has delivered 9% in year-on-year revenue growth, which has translated to 47% in EBITDA growth and a trailing twelve-month profit margin of 44%.

VICR Stock Factor Grades

VIRC scores exceptionally well across all factor grades, particularly when it comes to its ‘A’ valuation grade, given the stock’s run up in the last year. The company is currently trading at 8.1x forward earnings and 2.4x its book value, which are a -66% and -23% discount to the sector median respectively. VIRC is a solid small-cap stock, offering a unique competitive advantage in its industry that could continue to see gains in an environment that is more favorable toward small-caps.

5. Rapid7, Inc. (RPD)

• Sector: Information Technology
• Market Capitalization: $2.49B
• Quant Sector Ranking (as of 11/20/2024): 28 out of 548
• Quant Industry Ranking (as of 11/20/2024): 2 out of 45
• Quant Rating: Strong Buy

Rapid7 is a cybersecurity firm that provides solutions to help organizations detect, manage, and respond to vulnerabilities. The company’s strategy has evolved to center on managing its security options more efficiently through platform consolidation, launching two key package offerings: “Threat Complete” and “Cloud Risk Complete.” Both offerings have quickly gained traction, contributing to a 20% CAGR from Q3 2020 to Q3 2024 and a 6% increase in ARR in Q3 2024. The company’s deliberate pivot to profitable growth has resulted in a 4% increase in ARR per customer Y/Y. These gains have contributed to an overall ‘A’ growth grade for RPD, with a forward EBITDA growth of 58% vs. the sector’s 6% and an EPS FWD long-term growth (3-5Y CAGR) OF 25.80%, which is a 69% increase above the sector median.

RPD is making gains in terms of profitability; in Q3 2024, the company raised its full-year operating income range, with an implied operating margin of 19%, which, if achieved, would represent a 550 basis point increase from the full year 2023. This is reflected in the company’s SA Quant profitability grade, which has improved from a ‘C+’ just six months ago to its current ‘B’ grade.

RPD Profitability Grade

The company’s valuation is in line with the IT sector, with select metrics trading at significant discounts, such as its FWD PEG of 0.66x, which is a -64% reduction versus the sector median. And while RPD’s 12 and 9-month price momentum has dragged its overall grade, Wall Street analysts have expressed resounding optimism about the company’s near-term prospects, with an incredible 22 FY1 up revisions in the last 90 days and zero down revisions. RPD presents a compelling small-cap opportunity in the critical space of cybersecurity, with excellent growth, improving profitability, and solid valuation characteristics.

Concluding Summary

The recent surge in small-cap stocks has been driven by both monetary policy shifts and the anticipation of a Trump agenda that might benefit the sector. Small-caps tend to benefit from a lower-rate environment due to cheaper borrowing costs, a risk-on sentiment, and enhanced growth potential. Expectations of business-friendly policies under a Trump administration, as well as protectionist measures that would benefit domestically focused small-caps, caused the Russell 2000 to jump immediately following the election and might benefit the sector moving forward. SA Quant’s recent small-cap selections have delivered over 18% in returns in just under two months, outperforming the broader market and small-caps.

SA Quant has identified five well-positioned stocks for a sustained rally in the small-cap sector: OppFi Inc., Northeast Community Bancorp, Inc., DXP Enterprises Inc., Virco Mfg. Corporation, and Rapid7, Inc. These companies are top Quant-rated stocks, with positive factor grades, representing a blend of sectors that could flourish in a lower-rate environment and more accommodative policy under President Trump.

Seeking Alpha Quant Ratings and Factor Grades can help investors deal with uncertainty by presenting solid quant-vetted stocks. The SA Quant team has ten fundamentally strong companies for investors looking for fast-growing small-caps with solid momentum. In addition to many top small-cap stocks, if you’re seeking a limited number of monthly ideas from the hundreds of top quant Strong Buy rated stocks, the Quant Team’s best-of-the best, consider exploring Alpha Picks.