Freedom Finance analyst spotlights two small caps with big potential
For high returns, investors should look for small-cap investments with the potential to grow into the mid-cap or even large-cap segment. Georgiy Timoshin, a financial analyst at Freedom Finance Global, highlights two undervalued companies that he believes could do just that.
e.l.f. Beauty
Cosmetic brand e.l.f. Beauty currently has a market capitalization of $5.7 billion. It sells makeup and skincare products, with offerings for the lips, eyes, face, hands, and body. In Timoshin’s view, the company’s business model successfully leverages beauty trends, which has driven its rapid growth and development. The company is committed to diversity, inclusion, and sustainability (DEI), making products that are fully vegan and never testing them on animals. It also has a strong social media presence, collaborating with influencers to create viral content that appeals to a younger demographic, Timoshin adds.
Since its IPO in 2014, e.l.f. Beauty has posted average annual revenue growth of 24.3%. Thanks to its effective positioning and strong value proposition, the brand has attracted a broad customer base, notes Timoshin.
Over the last five years, e.l.f. Beauty stock has surged almost 480%. The FactSet consensus 12-month target price is $193.71 per share, for upside of 86% versus the closing price on Tuesday, October 8.
Stride Inc.
Stride Inc., with a market capitalization of $3.4 billion, is an educational technology company that offers proprietary and third-party curriculum, software systems, and educational services for children and teens.
The company is keeping pace with rapid changes in the online education market by actively using AI to personalize learning, offering hybrid programs through partnerships, expanding micro-learning opportunities, and enhancing professional skills and career readiness programs for adults, Timoshin explains. These factors, in his view, give Stride a competitive edge.
Since going public in 2005, Stride has notched average annual revenue growth of 18.2%. In July 2024, Forbes Advisor ranked Stride one of its top 10 small-cap stocks.
Over the last five years, Stride stock has added 194%. The FactSet consensus 12-month target price of $86 per share indicates 11.7% upside versus the October 8 closing price.
What else investors should know
Overall, both Stride Inc. and e.l.f. Beauty have flexibly adapted to market trends, while their management teams have taken the right steps to develop the businesses, says Timoshin.
Online incubator and accelerator Faster Capital has noted that investors overlook management quality at their peril. Meanwhile, Chuck Royce, the legendary small-cap investor and founder of small-cap-focused Royce Investment Partners, has mentioned that he likes to buy into companies whose management has been in place for at least five years.
