Although small-cap stocks have taken a hit so far this year, Goldman Sachs thinks expectations of a healthier economic backdrop make the group look attractive — especially since they’re already trading at fairly cheap valuations. The group had roared back in the fourth quarter and closed 2023 with a more than 15% gain on broadening market participation, but the Russell 2000 is now down 3.9% since the start of the new year. The S & P 500 , by comparison, has climbed 1.6% year to date. Smaller companies have been hurt by the expectation that interest rates may stay higher longer than investors anticipated. “Following the late-2023 rally in the Russell 2000, small-cap outperformance vs. large-cap peers has stalled out so far in 2024,” analyst Deep Mehta said, adding that “improving economic growth ahead and attractive relative valuations of small caps should drive healthy returns ahead.” Given small-cap companies’ recent underperformance, Mehta highlighted a slew of buy-rated names from Goldman’s small-cap coverage universe that have at least 5% upside to their target price, strong free cash flow generation, and are trading at a valuation discount of at least 5% to historical multiples. The companies on the list are also strong candidates for mergers and acquisitions, he said, and Goldman’s estimates are at least 2% above or below fourth-quarter and 2024 consensus estimates. Here are some of the firm’s top picks: Opera , which makes mobile and desktop web browsers, is a company with the potential for strong operating margin expansion that’s trading at a discount, according to Goldman. Analyst Eric Sheridan initiated shares at a buy with a $16.50 price target in December. Opera could see double-digit growth over the next several years, he said, as the company continues to gain market share in digital advertising and achieve revenue growth by advancing its products with artificial intelligence. Goldman thinks shares could gain more than 50% over the next year, according to last week’s closing price. The stock has run about 66% over the past 12 months, but is down roughly 17% since the start of the year. Solar equipment company Shoals Technologies is another Goldman small-cap favorite. Although shares have tanked amid a broader decline in solar stocks — the stock has lost more than 52% over the past year — Goldman sees a whopping 95% upside for the stock. In addition to trading at an attractive valuation, Goldman expects Shoals’ EBIT margin will grow from 17% in 2023 to 30% by the end of 2026. Shoals has recently grown in favor among other analysts. Last week, Barclays upgraded the stock to equal weight from underweight, saying it has an strong risk/reward profile and is on track to pay down its term loan by the end of 2026. One name that offers strong free cash flow margins and yields is dating platform Bumble , according to Goldman. It expects Bumble to grow its free cash flow margins to 25% by the end of 2025, up from 23% last year. Goldman’s price target indicates the potential for 41% upside for shares, which have been struggling for the past year amid a succession change and a disappointing fourth-quarter revenue forecast that signaled growing competition from other dating apps was hurting spending by Bumble’s user base. Analysts at Wells Fargo are also optimistic on Bumble, saying it could add roughly 500,000 paying users per year in the medium term, largely at the expense of rival Tinder. The firm had initiated the stock on Dec. 7 with an overweight rating and $19 price target, which suggests shares could jump more than 38% from Wednesday’s close. Other small-cap companies Goldman likes include coconut water company Vita Coco , food packaging company Sealed Air and crowd-sourced reviews platform Yelp . —CNBC’s Michael Bloom contributed to this report.
