We recently published a list of the 10 Most Undervalued Small-Cap Stocks To Invest In. In this article, we are going to take a look at where Peabody Energy Corporation (NYSE:BTU) stands against other most undervalued small-cap stocks to invest in.
Is Now the Time for Small Caps to Shine?
On January 24, Raymond James Investment Management’s chief market strategist, Matt Orton, appeared on CNBC’s ‘Power Lunch’ to discuss the earnings season and small-cap stocks. Orton believes that the earnings season so far has been very constructive. The unique thing about this earnings season is that it isn’t dominated by a few companies that are doing really well. Instead, the last few quarters have seen an expansion in earnings breadth in several different sectors.
Financials are finally participating in earnings, which holds immense significance. He said that one of the key opportunities he sees in the market at present is a down market cap. Small caps have not participated in much of the upside of the bull market for the past three years because they haven’t had earnings. However, the market is finally seeing an inflection point. Orton says that the key to these market dynamics is selectivity. You can’t just own the Russell 2000 and expect to outperform. Instead, it would be prudent to focus on the market cap and valuation opportunities.
Other experts are reflecting similar expectations. On February 14, Stacey Sears, Emerald Advisers portfolio manager, appeared on ‘Squawk Box’ to talk about the small-cap stock performance and market trends, among other things. She said that earnings growth in this season is coming ahead of expectations. Small caps have essentially been in an earnings recession over the better part of the last two years. She said that fiscal Q4 2024 was the first quarter they expected earnings to turn positive year-over-year, and the data shows that they are outpacing those expectations. The earnings projections were around 2% growth, but they are tracking the growth of high-single digits. The breadth of the outperformance is also encouraging, as the market is seeing a really nice upside within financials, healthcare, and technology. Revisions ratios are turning positive.
Typically, for small caps, the year starts with positive expectations, which gradually get tamped down as the year progresses. However, this year, the market is seeing the expectations hold in, which is highly encouraging for recovery in an asset class that has lagged for the better part of the last two years.
Is the Trump Administration a Tailwind for Small Caps?
Experts believe that the Trump administration may create solid tailwinds for two market groups drastically different from each other: small-cap stocks and big banks. While bank stocks are rallying, VettaFi’s Todd Rosenbluth anticipated that small-cap stocks may be one of the biggest players under Trump’s administration. He said that small-caps are majorly shielded from tariff threats and reshoring. CNBC reported that he voiced the following about the scenario:
“If we have a focus on the U.S. and making America even stronger, then small-cap companies stand to benefit from that because they have less multinational exposure.”
Since small-cap stocks do not have as significant multinational exposure as large or mid-caps, they are less likely to face uncertainty during market volatility.
Our Methodology
We sifted through stock screeners, online rankings, and ETFs to compile a list of 20 stocks with a forward P/E of less than 20 and a market cap between $300 million and $2 billion. We then selected the top 10 stocks that were the most popular among elite hedge funds as of Q3 2024. We sourced the hedge fund sentiment data from Insider Monkey’s database. The list is sorted in ascending order of hedge fund sentiment. Please note that the P/E ratios are as of February 14, 2025.
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).
Is Peabody Energy Corporation (BTU) the Best Mineral Stock to Buy Right Now?
A coal miner in a thick protective suit and helmet drilling for coal under bright lights.
Peabody Energy Corporation (NYSE:BTU) is a coal producer that provides essential products for producing reliable energy and steel. It owns interests in coal mining operations based in Australia and the US, along with interests in Middlemount Coal Pty Ltd. The company’s segments include Seaborne Thermal Mining, Seaborne Metallurgical Mining, Powder River Basin Mining, Other U.S. Thermal Mining, and Corporate and Other. Along with mining, the company provides coal marketing, brokerage, and transportation services. The company has been focusing on expanding metallurgical coal production, which is crucial in steel manufacturing.
Due to this transitional phase, Peabody Energy Corporation’s (NYSE:BTU) financial performance suffered in 2024. Revenue declined from $4.94 billion in 2023 to $4.24 billion, and net income dropped from $759.6 million to $370.9 million in 2024. However, these declines are temporary due to the capital-intensive nature of metallurgical coal production and a longer ramp-up period than thermal coal.
Apart from these short-term headwinds, the company’s expansion initiative is expected to help it attain higher margins in the long run. Its Centurion Mine in Queensland’s Bowen Basin is expected to produce 4.7 million tons annually. By 2025, Peabody expects metallurgical coal production to reach 8.5 million tons, with major contributions from Centurion and Shoal Creek. Peabody Energy Corporation’s (NYSE:BTU) acquisition of Tier 1 coal mines from Anglo American is anticipated to further bolster its industry position.
Overall, BTU ranks 8th on our list of the most undervalued small-cap stocks to invest in. While we acknowledge the potential of BTU, 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 BTU but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
