5 Small-Cap Growth Stocks I Liked In 2023, Still Look Good In 2024

According to several sources that I have come across in my research, there is a case to be made for investing in small-cap stocks in 2024.

Small-cap stocks could explode higher in 2024 for two reasons. First, small-cap stocks are cheap overall and could move higher to more normal valuations. Second, market conditions in 2024 could actually help make such a move happen.

In this review, I would like to highlight five small-cap growth stocks, with market caps ranging from just over $200 million to as high as $1.8 billion, that I recommended to Buy or Hold in 2023 and which have all gone up in value by more than 45% in the past six months. While all five are in the Industrial sector, two of them are industrial companies that specialize in electrical components and equipment: Powell Industries (POWL) and American Superconductor Corporation (AMSC). One company is in the Research and Consulting Services industry and specializes in IT, healthcare, and engineering: RCM Technologies (RCMT). The fourth, DLH Holdings Corp. (DLHC) is in the Human Resources and Employment Services industry. The fifth company is also in the Industrial sector, it is categorized in the Environmental and Facilities Services industry and is called CECO Environmental (CECO). The chart below shows the 6-month stock price performance of all five stocks, with POWL leading the charge at 88.85% after its recent post-earnings pop.

POWL

Because POWL is the leader of this 5-pack and has been in the news lately, I will start with that one. When I first wrote about POWL it was almost a year ago in March 2023. I wrote then that the stock is one to watch as a growth stock for the 4th Industrial Revolution. And while not a lot of other authors or analysts are talking much about the Fourth Industrial Revolution or Industry 4.0 as it is also referred to, it seems that my observations at the time have proven to be correct as the total return for POWL is up more than 250% since that article was published.

For those not already familiar with Powell Industries or how the Industry 4.0 trends impact their business, the blog post explains what the industry 4.0 trends are and how businesses are leveraging AI, automation, new technologies such as IOT sensors, data science, and process optimization to improve business efficiency and productivity.

Industry 4.0, also known as the fourth industrial revolution, aims to create smart manufacturing machines and systems that are connected, automated, and analyzed thoroughly to improve production, reduce costs, and optimize processes.

When I last wrote about POWL nearly a year ago, this is what I wrote at the time, when the stock was trading for about $44 per share.

POWL currently has a market cap of just over $500M and has grown its share price over 120% in the past year. The stock trades at a forward P/E of 41x projected 2023 EPS of 1.09 and pays a 2.3% dividend yield. The company reported $522 million in revenues in FY2022 and has an unleveraged balance sheet with zero debt.

In just under a year, the market cap has more than tripled to about $1.8B, the shares are trading for a little over $153, and the forward P/E is still less than 20.

SA Quant Strategist Steven Cress still likes POWL even after its 50% post-earnings price pop and ranks the stock #1 in the Electrical Components and Equipment Industry.

While EPS estimates keep rising, POWL keeps beating the estimates every quarter and those estimates keep getting revised upward. I believe that POWL has further upside ahead despite the recent outperformance of the stock over the past several years, as Industry 4.0 is still in the early innings.

POWL also pays a small dividend, which it just increased. Finally, to sum up the company’s recent performance and forward outlook for 2024, this response by CFO Mike Metcalf to an analyst question about Q1 2024 earnings provides some assurance that POWL is firing on all cylinders this year:

First, no, there were no unusual non-recurring events in the quarter. We’ve been very pleased with the margin rates as we exited the last two to three quarters and the margin expansion that we’ve seen resulting from a lot of the work that the team’s done over the last 18 months to 24 months. It’s really being driven by the volume and the operating leverage across the business. Really every division has got very, very healthy backlog, and we’re seeing really good project execution.

While the price may have peaked for now, I would be a buyer at a price below $150. If we get a market correction as many are expecting soon, I could easily envision the price retreating to that level or lower before taking off again.

AMSC

In keeping with my theme regarding growth stocks that stand to benefit from the Fourth Industrial Revolution, I first wrote about AMSC in August 2023. At that time, I had just learned about the stock, and I rated it a Hold based on what I learned. Then in November last year, after I got a request to provide an update, I upgraded my rating on AMSC to a Buy. When I wrote the November article, this is what I had to say at the time:

AMSC just reported FY Q2 2023 results and is down more than -20% since I wrote the August piece, which was published just after the stock price popped 60% in one day and then quickly retreated. Nevertheless, the stock is up over 115% YTD and is poised to continue higher. With wins across the board and strong momentum going into the company’s fiscal Q3 and looking strong for 2024, I like the stock at the current price below $8 and rate AMSC a Buy for its long-term growth potential.

Now, four months later, the stock is trading at a price above $14 and is up more than 85% since the article was published.

On January 24, 2024, AMSC reported Q3 FY 2023 earnings that included 64% YOY revenue growth to $39 million (from $23.9 million in Q3 FY 2022) and projections for continued revenue growth into FY 2024.

“We outperformed expectations during the third quarter of fiscal 2023 with year-over-year revenue growth of over 60%, reporting non-GAAP net income for a second consecutive quarter and $1.3 million in operating cash flow. Our team achieved this thanks to strong customer demand, our pricing initiatives and a favorable product mix,” said Daniel P. McGahn, Chairman, President and CEO of AMSC.

For the fiscal fourth quarter ending March 31, 2024, the company expects to realize revenues between $36 to $40 million. The company ended the third quarter with over $137 million in its 12-month backlog, an increase of 25% over the previous year.

Over the past 90 days, there have been multiple upward revenue and earnings revisions. Daniel McGahn, Chairman, President, and CEO of AMSC stated in the press release:

Given this backlog position, strong demand in our end markets, and shortening customer lead times, we believe we are very well positioned for the fourth fiscal quarter which will end March 2024. We are proud of these results, which represent our deliberate diversification into growing markets, and look forward to delivering year-over-year revenue growth for fiscal 2023.

One of their bigger customers for the wind energy market is Inox Wind out of India. In January, the company announced a large new order from Inox Wind that amounts to a backlog of about $8 million in 2024.

Inox Wind has requested immediate delivery under this $8 million follow-on order. AMSC expects to ship these ECS over the course of calendar year 2024.

In addition to renewables, the growth markets for new energy power systems for mining and materials and for the semiconductor industry also provide tailwinds and further diversification of the business. The military applications and product offerings have also been increasing, with new and modernized ship protection systems capturing new business from the US Navy in particular.

The company believes that they are at an inflection point for the core businesses, as explained on this slide from the January 2024 investor presentation.

Just 3 years ago, the stock was trading at a high of about $30. By 2025, it is my belief that AMSC can surpass that level if the current growth trajectory continues.

RCMT

When I first learned about RCM Technologies, it was in 2022 and the stock was referred to as a “Tiny Titan” back then due to its very small market cap under $200 million along with a low price to sales ratio indicating strong momentum. Although I followed the stock for more than a year, I did not write my own analysis of it until last November, when I suggested that the company had reached a tipping point in its growth and was poised to take off. In the conclusion of that article, I summarized my thoughts with:

RCMT is poised to take advantage of a growing contract, specialized recruitment, and outsourced employment trend as companies struggle to hire qualified specialists in the fields of IT, Engineering, and Healthcare. With existing clients in schools, engineering firms, aerospace and defense industries, and Life Sciences looking to expand and/or request repeat business, RCMT is positioning itself for long-term growth.

My instincts proved to be correct, as the stock soared by more than 50% since that article was published.

Shortly after my article was published on November 6, 2023, the company reported Q3 results on November 8 that beat EPS estimates, and the guidance for Q4 was good enough to cause investors to bid up the share price of the stock considerably post-earnings. In fact, this paragraph from the earnings press release sums up the company’s outlook for long-term growth prospects:

Bradley Vizi, Executive Chairman of RCM Technologies, commented, “The cadence of our business continues to accelerate as we move through the year. As such, we expect the fourth quarter to be our strongest, and continue to be confident that the long-term outlook for RCM is bright.”

While short-term results over the past three years (post-Covid pandemic) have been solid and improving, the growth over the past five years has been even more impressive, as illustrated by the stock price chart.

Although the price has risen by more than 525% in the past five years, the stock still trades at a forward P/E of less than 15, which is extremely undervalued for a growth stock that continues to show strong momentum heading into 2024.

Although the stock has mostly strong Quant factor grades, the only warning sign that I am seeing is the poor grade for Revisions with two downside revenue and EPS revisions.

Nevertheless, EPS growth of more than 14% YOY is still expected to occur by the end of this year as the company continues to expand through both organic growth and acquisitions.

Bear in mind that as a stock with a very small market cap, there is the potential for some price volatility with RCMT, especially if we see a broader market correction in the next few weeks or months. However, the long-term growth prospects continue to look quite positive as explained by the CEO, and any short-term volatility could be viewed as a potential buying opportunity.

There are only 2 Wall Street analysts following the RCMT stock and both give it a Strong Buy rating with an average price target of $34. The price can be volatile and in a market correction there could be a significant pullback to the low to mid-$20 range, which would present a buying opportunity.

DLHC

Another small-cap company that is involved in human resources and employment outsourcing/contract support services, but focused on Federal agencies, is DLH Holdings Corp. When I first wrote about DLHC it was Veterans Day 2021 and the stock had just received multiple contract awards related to the Covid-19 recovery. I wrote an update in July 2022 upgrading the stock to a Strong Buy at the time despite the post-Covid government spending slowdown. Then in October 2023, I wrote an update on DLHC suggesting it was time to take a fresh look. This time I downgraded the rating to just a Buy since the federal government was again looking at a fiscal impasse with uncertainty around federal spending in 2024 due to Congressional stalling over the budget.

Back in December 2022, DLHC made an acquisition to strengthen its IT support and cyber-security capabilities. During the Q4 2023 earnings report on December 6, for the fiscal year ending September 30, DLH President and CEO Zach Parker summarized the FY23 results and suggested that the acquisition had indeed boosted sales:

With a year under our belt since our transformative technology acquisition, we are pleased with the evolution of DLH into a unique provider of digital transformation and cyber security, science research and development, and systems engineering services across a broad array of health, human services, and military clients.

Our top line in fiscal 2023 surpassed $375 million, and we delivered $42.1 million of Adjusted EBITDA. At the same time, we remained focused on paying down debt to strengthen the balance sheet and decrease interest expense – reducing debt by more than $28 million since completing the acquisition. Our cash-generating ability continues to return value to our shareholders through debt reduction while providing the financial flexibility to pursue strategic opportunities to deliver organic growth.”

Then on January 31, the company reported Q1 FY 2024 results. In that quarter, DLHC reported a beat on EPS, but revenues were just shy of the $100M target they were shooting for, although still increased nearly 35% YOY. The debt level was further reduced during the quarter as well, down to $174.4 million at quarter end compared to $179.4 million at the end of September.

Those solid results were delivered despite the government operating under a Continuing Resolution. However, until the federal spending debate and Continuing Resolution are resolved, uncertainty remains potentially until March 1 when the next deadline for a government shutdown is looming.

CEO Parker spoke about the impact of the slowdown in new contract awards during the quarter in the management discussion on the Q1 earnings press release:

Revenue rose year-over-year, reflecting our strategic acquisition, while we bid on numerous new opportunities enabled by our robust technology platform. Slower-than-expected release of bidding opportunities and decisions on contract awards across multiple fronts is clearly a challenge, but we remain focused on targeting as many avenues for growth acceleration as possible within our target markets. We believe award momentum should build throughout this fiscal year, and our innovative solutions and services are expected to benefit from wide bipartisan support. In the meantime, we continue to pay down our outstanding debt using our strong cash generation. As we face some headwinds in the award environment, we are resolute in our efforts to capitalize on the exceptional performance of our employees, our technology-enabled platforms, and our robust capabilities to expand and grow our contract portfolio.

So, while the company continues to pay down debt and deliver exceptional results on existing contracts, the uncertainty around future contract awards and the timing of them have created a short-term pause in the momentum of DLHC stock. This situation may lead to a buying opportunity for patient investors.

CECO

The first time that I wrote about CECO Environmental was in November 2022 when I discussed how the company appeared to be successfully executing the company’s turnaround plan that had been ongoing since 2020 when they brought in a new CEO. This is what I wrote at that time:

CECO Environmental Corp was incorporated in 1966 and is headquartered in Dallas, Texas. Although the company has been around for many years, they struggled to maintain the growth and profitability that shareholders demanded until they hired the current CEO, Todd Gleason, in July 2020. In the past two years the company has performed a major turnaround in its business strategy and operational performance, resulting in double digit growth this year that is expected to continue into 2023.

I rated the stock a Strong Buy at that time when it was trading for just under $12. Then in June 2023, I published an updated review of CECO again rating the stock a Strong Buy. The stock is now up more than 60% since that time, and I still believe that the stock has further upside.

On November 7, 2023, the company announced Q3 results that again beat expectations and raised the outlook for FY 2023 while also setting expectations for an additional 10% increase in FY 2024 results.

The company said it now expects its FY23 revenue to be between $525M- $550M, up 24% Y/Y, and adjusted core profit of $55M- $57M.

The firm also introduced its FY24 outlook of $575M – $600M in revenue, up 10% Y/Y at the midpoint, and its adjusted core profit to be $65M -$70M.

The company also closed the quarter with nearly $400M in backlog. On the earnings call, CEO Gleason spoke to the record backlog and indicated that the company continues to operate at an exceptional rate of efficiency:

This is the fourth quarter in a row with record backlogs, which continues to support future growth projections. We also delivered the highest gross profit dollar level in our history, benefiting from the tremendous sales volumes. Importantly, we generated record free cash flows for any quarter as we executed very well on our working capital management.

There are 6 Wall Street analysts now following CECO and 3 give it a Strong Buy rating while 3 rate the stock a Buy. Those analysts also indicate substantial expected EPS growth in 2024.

While CECO stock has risen by a little over 40% in the past year, it still has plenty of upside potential ahead, trading at just 20x FY 2024 earnings with additional growth expected.

The company completed two additional acquisitions in 2023, has a record backlog heading into 2024, and has a large and growing target market for its services. With the recent growth through acquisition and a balanced portfolio of solutions that the company now offers, the formula is working, and the addressable markets are expanding.

Like the other small-cap stocks discussed above, CECO is subject to some price volatility and could easily pull back well below $20 on a broader market correction, but the long-term potential is outstanding. I recommend that you add the stock to your watch list of growth stocks that are likely to outperform in 2024.

Summary

As we approach the end of the second month of 2024, the case for investing in US small-cap stocks appears attractive according to BNP Paribas Asset Management and investors may wish to consider rotating into some quality small-cap names to boost their portfolio performance.

Although US small-cap stocks joined the extraordinary rally in the final quarter of 2023, many small caps continue to trade at a significant discount to their larger-company counterparts. This creates an attractive entry point. So says Geoff Dailey, Head of US Equities.

In my review above, I highlight five names that should be on your watch list if you are interested in adding some high-quality small-cap growth picks. Each company is at a turning point in its growth trajectory for different reasons, and each has different catalysts coming up that may trigger some price action that could present a buying opportunity. If the current bullish market sentiment should stall or change direction, that could also result in a short-term price drop for one or more of these five stocks. I suggest that if you have dry powder available, keep an eye on these 5 names to take advantage of any potential buying opportunities should they arise.