20 favorite small-cap stocks for 2024 among Wall Street analysts

By Philip van Doorn

The analysts see upside of 38% to 217% for a group of small-cap stocks in a variety of industries

(This is the second of a three-part series featuring lists of top stock picks among analysts working for brokerage firms. Part 1 screens large-cap stocks, led by Nvidia Corp.)

The 2023 stock-market rally has been led by the "Magnificent Seven" companies, which have driven an accelerating upward trend for the large-cap benchmark S&P 500. Shares of smaller and medium-sized companies have also rallied, but not as much:

All three indexes are weighted by market capitalization, but the lack of an upward limit means the S&P 500 is more concentrated than the S&P Small Cap 600 Index SML or the S&P 400 Mid Cap Index MID. In fact, the Magnificent Seven - Apple Inc. (AAPL), Microsoft Corp. (MSFT) Amazon.com Inc. (AMZN), Nvidia Corp. (NVDA), Alphabet Inc. (GOOGL) (GOOG), Tesla Inc. (TSLA) TSLA,and Meta Platforms Inc. (META) - make up more than 28% of the SPDR S&P 500 ETF Trust SPY. And when weighted by their market capitalization at the end of 2022, the Magnificent Seven have contributed 59% to the S&P 500's total return this year through Dec. 21.

All returns in this article include reinvested dividends.

When considering smaller companies for investment, investors often focus on the Russell 2000 Index RUT, but the following screen begins with the S&P Small Cap 600 Index, which is more selective. Initial inclusion in the S&P Small Cap 600 requires companies to report four subsequent quarters of profitability, among other criteria.

This year's rally follows broad declines during 2022. So here's a look at total returns from the end of 2021 through Dec. 21, along with forward price-to-earnings ratios for all three broad S&P indexes:

   Sector or Index      Return since end of 2021  Forward P/E  Current P/E to 5-year average  Current P/E to 10-year average  Current P/E to 15-year average 
   S&P Small Cap 600                         -3%         14.3                            98%                             94%                             98% 
   S&P Mid Cap 400                            1%         14.5                            96%                             94%                             98% 
   S&P 500                                    3%         19.6                           102%                            109%                            121% 
                                                                                                                                             Source: FactSet 

The large-cap stocks as a group trade above their five-, 10- and 15-year weighted averages while the small-caps and midcap stocks trade below the averages.

Read: Beaten-down small-cap stocks are roaring back. Why they could soar in 2024.

Screening the S&P Small Cap 600

Starting with the full index, we narrowed the list to 385 companies covered by at least five analysts polled by FactSet. Then we pared the list to 91 companies with at least 75% "buy" or equivalent ratings.

Analysts working for brokerage firms typically assign 12-month price targets to the stocks they cover. Among the 91 companies, here are the 20 with the highest indicated upside potential for 2024, based on consensus price targets:

   Xperi Inc.                              Ticker   Share "buy" ratings  Dec. 22 price  Consensus price target  Implied upside potential  Forward P/E 
   Vir Biotechnology Inc.                   VIR                     88%         $10.11                  $32.00                      217%          N/A 
   Arcus Biosciences Inc.                   RCUS                    82%         $18.15                  $41.00                      126%          N/A 
   Xencor Inc.                              XNCR                    92%         $20.94                  $39.83                       90%          N/A 
   Dynavax Technologies Corp.               DVAX                   100%         $13.84                  $24.80                       79%        185.0 
   ModivCare Inc.                           MODV                   100%         $43.89                  $75.50                       72%          6.8 
   Xperi Inc                                XPER                    80%         $10.68                  $18.20                       70%         30.1 
   Ligand Pharmaceuticals Inc.              LGND                   100%         $71.51                 $114.80                       61%         16.8 
   Ironwood Pharmaceuticals Inc. Class A    IRWD                    83%         $11.18                  $17.83                       60%         17.2 
   Thryv Holdings Inc.                      THRY                   100%         $20.60                  $32.75                       59%         25.5 
   Catalyst Pharmaceuticals Inc.            CPRX                   100%         $16.58                  $26.20                       58%         13.8 
   Green Plains Inc.                        GPRE                    80%         $25.51                  $40.30                       58%         17.3 
   Payoneer Global Inc.                     PAYO                   100%          $5.12                   $8.00                       56%         21.3 
   Patterson-UTI Energy Inc.                PTEN                    75%         $10.91                  $17.00                       56%          8.4 
   Arlo Technologies Inc.                   ARLO                   100%          $9.41                  $13.80                       47%         24.4 
   Pacira Biosciences Inc.                  PCRX                   100%         $33.05                  $48.40                       46%          9.6 
   Helix Energy Solutions Group Inc.        HLX                     83%         $10.45                  $15.00                       44%         16.3 
   Livent Corp.                             LTHM                    75%         $17.23                  $24.34                       41%         10.1 
   Talos Energy Inc.                        TALO                    78%         $14.31                  $20.00                       40%         18.1 
   Smart Global Holdings Inc.               SGH                    100%         $18.73                  $26.17                       40%         14.1 
   Digi International Inc.                  DGII                   100%         $26.16                  $36.14                       38%         12.8 

Click on the tickers for more about each company.

Click here for Tomi Kilgore's detailed guide to the wealth of information available for free on the MarketWatch quote page.

Forward P/E ratios aren't available for the first three stocks on the list because analysts expect these companies to report negative earnings over the next four quarters.

Don't miss: 13 stocks that are down for 2023 but may bounce back in 2024 or beyond

-Philip van Doorn

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

12-26-23 1219ET

Copyright (c) 2023 Dow Jones & Company, Inc.