We recently compiled a list of the 10 Best Small-Cap Stocks Ready To Explode.In this article, we are going to take a look at where Evolent Health, Inc. (NYSE:EVH) stands against the other small-cap stocks.
Prospects For Extended Outperformance Of Small-Cap Stocks
On October 7, Chuck Royce, founder and Senior Advisor, and Francis Gannon, Co-Chief Investment Officer and Managing Director of Royce Investment, discussed the outperformance of small-cap stocks. While discussing the reasons that led to the Russell 2000 Index doing well in Q3 '24, Gannon noted that the strong performance of the Russell 2000 Index, which was up 9.3%, in the third quarter of 2024 can be attributed to a "quintessential reversion to the mean," as small-caps had lagged behind larger companies for an extended period. He thinks that the rebound was not surprising given the historical trends, as the small-cap index outperformed the large-cap Russell 1000, up 6.1%, and the mega-cap Russell Top 50, up 4.2% during this time.
On the other hand, Royce mentioned that he was surprised by the concentration of the small-cap gains. He noted that all the gains for the quarter were compressed at the start, as by early July 16, the index had already achieved a 10.6% increase from the end of June, marking its high for the quarter. Royce further mentioned that this rapid ascent was followed by a notable decline, with the index dropping 10.1% from July 16 to August 7 before recovering most of its losses by the end of September. Despite this volatility, he expressed satisfaction with the small-cap performance overall for the quarter, especially since it marked a reversal after small-caps last outperformed large-caps in Q4 2023.
Building further upon the volatility of small-cap stocks, Royce expressed that while volatility in small-cap stocks can be concerning, it is a normal part of investing in this asset class. He emphasized that they welcome volatility as it allows them to take advantage of price fluctuations for long-term gains. Historically, significant intra-year declines are common for small-caps, with the Russell 2000 experiencing double-digit pullbacks in 22 out of the last 25 years.
While answering how the sector can sustain its market leadership performance, Gannon highlighted that market breadth among large caps often leads to better performance for small caps. He pointed out that when the equal-weighted Russell 1000 outperformed its capitalization-weighted counterpart, small-caps typically led in performance. This trend suggests that an expansion of returns across different sectors is a positive indicator for small-cap stocks.
Moreover, both Royce and Gannon stressed that earnings growth is crucial for the long-term success of small-cap stocks. Gannon stated that while short-term market psychology can influence stock prices, consistent earnings are fundamental for sustaining long-term performance. He noted that despite a significant portion of small-cap companies lacking earnings, around 44.6%, those with earnings are expected to grow faster than their large-cap counterparts in 2025.
Our Methodology
To curate the list of 10 best small-cap stocks ready to explode we used the Finviz stock screener and CNN. Using the screener we shortlisted small-cap stocks (market-cap between $500 million to $2 billion) for which analysts are expecting more than 50% upside from the current stock price. Once we had shortlisted the stocks we cross-checked the analysts' upside potential from CNN. Lastly, we ranked the stocks based on the ascending order of the analyst upside potential. Please note that the data was recorded on November 15, 2024.
Why do we care about what hedge funds do? 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 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A doctor looking at their computer, discussing their patient's care options with a group of experts.
Evolent Health, Inc. (NYSE:EVH) is a healthcare company that specializes in connecting care for individuals with complex medical conditions, such as cancer, cardiovascular diseases, and musculoskeletal issues. The company operates through three main business segments including, Medicaid, Medicare, and Commercial and Other. It generates revenue from the fees of the services it provides to healthcare providers and payers under various contracts.
The company is riding the tailwind from improving the macroeconomic environment and Federal Reserve rate cuts. During the third quarter of fiscal 2024, Evolent Health, Inc. (NYSE:EVH) announced that its revenue for the quarter improved 28% year-over-year to reach $740 million. Management also announced six new revenue agreements during the quarter, these agreements are expected to contribute over $200 million in incremental annualized revenue. Moreover, this was also a record number of agreements signed in a single quarter in the company’s history.
Its Performance Suite, which integrates clinical pathways, technology, and financial incentives to improve patient outcomes while controlling healthcare costs, was the major revenue driver. The Performance Suite improved 77.05% year-over-year due to a significant increase in product lives because of the growth of oncology and cardiology risk clients.
Evolent Health, Inc. (NYSE:EVH) ranks as the 4th best small-cap stock ready to explode as analysts' 12-month median price target is pointing towards a 118.09% upside from the current levels.
Carillon Eagle Small Cap Growth Fund stated the following regarding Evolent Health, Inc. (NYSE:EVH) in its Q2 2024 investor letter:
“Evolent Health, Inc. (NYSE:EVH) is a leader in value-based care. It leverages a unique platform and AI technology to assist physicians in delivering efficient care plans for patients with cancer, cardiovascular disease, and complex musculoskeletal conditions, thereby reducing medical costs. Despite recent stock pressure due to higher than expected care levels depressing gross margins, the company’s contracts with managed care organizations ensure compensation adjustments, keeping Evolent on track for a healthy earnings before interest, taxes, depreciation, and amortization (EBITDA) run rate by the end of the year. Given its severe undervaluation, Evolent could potentially attract acquisition interest from private equity or managed care organizations.”
Overall EVH ranks 4th on our list of the best small-cap stocks to buy. While we acknowledge the potential of EVH 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 timeframe. If you are looking for a promising AI stock that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
