We recently compiled a list of the Stock portfolio of top investors: 7 small-cap stocks to invest in. In this article we will look at where PHINIA Inc. (NYSE:PHIN) compares to the other small-cap stocks.
Market experts believe that strong and stable earnings growth, a favorable valuation environment and expectations of lower interest rates provide a supportive environment for global small-cap stocks. American Century Investments believes that following the outperformance of large-cap stocks, investors have seen a notable rotation toward small-cap stocks in July. That said, after the volatility of early August, investors are still wondering whether or not small-cap stocks are well positioned to hold up for the rest of the year and into 2025.
Tailwind for small cap stocks
US small-cap stocks continue to show signs of renewed momentum, signaling a shift in performance leadership. Janus Henderson Investors believes that the Russell 2000 Index outperformed the large-cap indices and the “Magnificent Seven” stocks from mid-July to the end of August. Global small-cap stocks have felt the impact of increased inflation, higher interest rates and a slowdown in economic growth over the past three years. The sharp increase in interest rates from 2022 caused a rotation from small-caps to large-caps. Therefore, it was mainly small-cap growth stocks that suffered the most.
Despite the economic uncertainty, American Century Investments believes that inflation appears to be moving in the right direction, and central banks have begun cutting interest rates. The US Fed's approach remains more cautious than expected. However, with interest rates expected to fall further, investors are expected to benefit from an environment of moderate economic growth and lower inflation. The investment firm believes that this environment will be conducive to risk-taking and will support small caps.
Such a pivot is expected to allow investors to shift their focus from central bank policies to corporate profits. This will help create a more favorable environment for active security selection. In the long run, it is expected that the investors will be inclined to expect the companies to have better earnings growth. Furthermore, Janus Henderson Investors believes that small caps have historically performed strongly when their market capitalization as a percentage of the total market falls below 5%. This threshold has recently been exceeded.
Appreciation gap offers further opportunities
The extended period of large-cap dominance resulted in a significant widening of the valuation gap between small-cap and large-cap stocks, according to Janus Henderson Investors. The relative valuation of small caps compared to large caps stood at 16e percentile (end of August). The investment firm also said that small caps have only been this cheap once since the creation of the Russell 2000 Index in 1978.
Current valuations impact future returns, and current inequality provides a strong entry point. Lower inflation could disproportionately boost small caps' earnings growth due to their generally lower pricing power and higher labor intensity compared to larger counterparts.
In addition, Janus Henderson Investors noted that small-cap stocks have historically outperformed large-cap stocks by ~10% during the first twelve months following an initial Fed rate cut. The company believes the potential return to normalized costs of capital could boost small cap profits. So when financial conditions ease, smaller companies can easily access financing for growth.
Our Methodology
To list seven small-cap stocks to invest in, we used a Finviz screener to filter out the stocks from the small-cap space. That's why we chose companies with a market capitalization of less than $2 billion. Finally, as of Q2 2024, the stocks are ranked in ascending order of their hedge fund sentiment.
Why are we interested in the stocks that hedge funds invest in? The reason is simple: our research shows that we can outperform the market by imitating the best stock picks from the best hedge funds. Our quarterly newsletter strategy selects 14 small- and large-cap stocks each quarter and has returned 275% since May 2014, beating the benchmark by 150 percentage points (see more details here).
A line of workers at an industrial fuel cell power plant as the sun sets behind them.
PHINIA Inc. (NYSE:PHIN)
Market capitalization as of October 9: $1.96 billion
Number of hedge fund holders: 35
PHINIA Inc. (NYSE:PHIN) engages in the development, design and manufacture of integrated components and systems that optimize performance, increase efficiency and reduce combustion and hybrid emissions for commercial, light-duty vehicle and industrial applications.
With battery electric vehicles (BEVs) expected to be recalibrated, the company's focus on ICE efficiency improvements positions it well in the market. PHINIA Inc.'s strategy (NYSE:PHIN) is expanding beyond its current strong position in the light vehicle (LV) market. The company is focused on diversifying its revenue streams by increasing its exposure to the commercial vehicle (CV) and aftermarket (AM) segments.
PHINIA Inc. (NYSE:PHIN) aims for a mix where LV represents ~30% of sales by 2030. Wall Street believes this diversification strategy should drive long-term growth as CV and AM segments typically offer higher margins and significant resilience in the challenging environment. The expected drivers for PHINIA Inc. stock price. (NYSE:PHIN) consists of potential OEM (Original Equipment Manufacturer) announcements, along with additional cash return announcements.
Despite challenging commercial and light vehicle markets, the aftermarket business and new product pipeline consisting of alternative fuel products should enable strong growth. PHINIA Inc. (NYSE:PHIN) expects to leverage its brand, capabilities and scale in an effort to navigate market weakness and create strong shareholder value.
Analysts at UBS Group started covering PHINIA Inc. shares on September 4. (NYSE:PHIN).e September. They gave a buy rating and a $55.00 price target. Ariel Investmentsan investment management company, has released its investor letter for the first quarter of 2024. This is what the fund said:
“Manufacturer of high-quality fuel and electrical systems, Phinia Inc. (PHIN) also rose in the period on solid earnings results and a positive outlook for full-year 2024. Healthy consumer prices, new sales in all end markets, continued weakness in electric vehicles, growth in light vehicle original equipment and tight cost controls contributed to the disappointing sales of commercial vehicles in China are more than offset. Meanwhile, management continues to prioritize capital return to shareholders through buybacks and dividends. Looking ahead, we expect PHIN to deliver sustainable, profitable growth and significant cash generation as it realizes operational efficiencies, similarities with its former parent company BorgWarner Inc. and will also expand its industrial and aftermarket customer base.”
In short PHIN is in 1st place on our list of small-cap stocks to invest in. While we recognize PHIN's potential as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns over a shorter period of time. time frame. If you're looking for a deeply undervalued AI stock that's more promising than PHIN, but trades at less than five times earnings, check out our report on the cheapest AI stocks.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley And Jim Cramer says NVIDIA 'has become a wasteland'
Disclosure: None. This article was originally published on Insider Monkey.
