Is Aurinia Pharmaceuticals Inc. (AUPH) the Best Small-Cap Growth Stock to Buy Now?

Talha Qureshi

Tue, Feb 25, 2025, 9:31 AM 4 min read

Are Small-Cap Stocks Poised for Growth?

On November 4, 2024, Nick Sheridan, Portfolio Manager at Janus Henderson released a report on small-cap stocks exploring how these stocks offer unique growth and diversification opportunities. Sheridan highlighted that maintaining visibility amidst the dominance of mega-cap tech stocks has been a challenge for small-cap stocks. Historically, small caps have been overshadowed by larger companies, which have captured investor attention with themes like artificial intelligence and have seen ever-higher multiples as a result. However, Sheridan notes that this is not a new phenomenon. Small caps have consistently delivered higher earnings growth than large caps over time, therefore, making them an attractive option for investors seeking growth and diversification.

In recent years, mega-cap tech stocks have been the driving force behind the stock market, but cracks have begun to appear in their performance, leading investors to seek value elsewhere. On the other hand, as interest rates are expected to decrease, small caps are poised to benefit, as they historically perform well in such environments. Sheridan highlighted that the key to small-cap outperformance lies in their ability to grow earnings more rapidly than large-caps, which struggle to achieve significant growth due to their size and market penetration. Small caps can expand into new markets, acquire new clients, or broaden their product range more easily than larger companies.

Moreover, small caps also serve as a diversification tool for investors. They often operate in different sectors, such as industrials and materials, and are more focused on local markets, providing exposure to structural trends like de-globalization. Sheridan noted that despite their potential, small caps remain under-researched and undervalued, offering opportunities for investors willing to conduct thorough research to identify quality growth companies. In addition, the persistent merger and acquisition activity, where larger companies acquire smaller ones at a premium, further supports the case for investing in small caps. According to Bloomberg, 95% of M&A deals involve a small-cap target, thereby adding substance to Sheridan’s argument. Lastly, Sheridan concluded by mentioning that small caps remain an undiscovered territory for many investors, requiring more effort to uncover hidden gems but offering substantial rewards for those who do.

Our Methodology

To curate the list of the 10 best small-cap growth stocks to buy now, we used the Finviz stock screener, Seeking Alpha, and Insider Monkey’s Q4 2024 hedge funds database. Using the screener we compiled an initial list of small-cap growth stocks. Next, we used Seeking Alpha to shortlist stocks that have grown more than 30% during the past 3 years. Lastly, we ranked the stocks in ascending order based on the number of hedge fund holders sourced from Insider Monkey’s database.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 373.4% since May 2014, beating its benchmark by 218 percentage points (see more details here).

Is Aurinia Pharmaceuticals Inc. (AUPH) the Best Small-Cap Growth Stock to Buy Now?

A scientist using a microscope to inspect a tissue sample in a research lab setting.

Aurinia Pharmaceuticals Inc. (NASDAQ:AUPH)

3-Year Sales Growth: 45.03%

Number of Hedge Fund Holders: 23

Aurinia Pharmaceuticals Inc. (NASDAQ:AUPH) is a biopharmaceutical company that focuses on creating treatments for people with autoimmune diseases, which are conditions where the body’s immune system mistakenly attacks its own tissues. It has developed a medicine called LUPKYNIS, which is used to treat lupus nephritis, and is also working on a new treatment called AUR200, which aims to help people with other autoimmune diseases.

During the fiscal third quarter of 2024, the company achieved $67.8 million in total net revenue, marking a 24% increase from the previous year. Notably, net product revenue was $55.5 million, up by 36% year-over-year. The growth was driven by a 25% year-over-year increase in patients on LUPKYNIS therapy. Aurinia Pharmaceuticals Inc. (NASDAQ:AUPH) is expanding geographically too, as LUPKYNIS has received approval in Japan. Management anticipates low double-digit royalties on net sales in Japan. It is one of the best small-cap growth stocks to buy now.

Overall, AUPH ranks 5th on our list of best small-cap growth stocks to buy now. While we acknowledge the potential of AUPH as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than AUPH but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.