In this piece, we will take a look at the 12 best micro cap stocks to invest in. To skip our introduction to micro cap investing, some benefits, and potential risks, you can skip ahead to 5 Best Micro Cap Stocks To Invest In.
Depending on who you ask, it can be argued that the stock market is divided into two worlds. In what might be characteristic of the Power Law, a few stocks often dominate most of the conversation. Yet, while big companies in nearly every sector, such as Apple Inc. (NASDAQ:AAPL), JPMorgan Chase & Co. (NYSE:JPM), and Chevron Corporation (NYSE:CVX), dominate media and analyst attention, there are thousands of other firms that are also publicly traded, and their small share prices, coupled with modest valuations, create chances of spectacular returns.
One of the smallest categories of stocks measured through their market capitalization is the micro cap category. These stocks are often also called penny stocks, and their size coupled with limited public interest also leaves them out of the traditional sphere of media coverage. At the same time, the shares of such companies are often quite risky especially during rough economic times since capital always flows to the safety of stability if there are broader macroeconomic concerns about the business environment. Big and mega cap stocks are representative of firms that have millions and billions of dollars in assets, cash, and securities. This provides their business operations a buffer if sales drop, and by extension, stabilizes the stock price.
On the flip side, micro cap companies do not have such sizeable assets, and their share price performance depends on the companies' ability to grow business and capture market share from rivals. Naturally, investors are more hesitant to pile into micro cap stocks unless there are underlying strengths that can serve as future share price catalysts.
Additionally, micro cap stocks also come with the risks of low liquidity and potential frauds, which leave some of the most vulnerable investors, particularly in the retail sphere, at risk of significant losses. One of the most common stock market frauds is a pump and dump, which sees nefarious actors team together to buy micro cap or similar stocks in bulk. After this forces the price upwards, as other market participants also buy the stock since it's growing, the shares are sold.
Research from Concordia University shows that small cap and micro cap stocks tend to be a market out performers after the economy has exited a trough. However, before a downturn, large cap stocks tend to hold their ground better. In terms of percentage returns, from peak to troughs for the business cycle between December 2007 and June 2009, the S&P500's 38.1% drop was slightly lower than a small cap stock portfolio's 40.15% drop. However, it's the recovery period where small cap stocks truly shine, as the data shows that in the fifteen post recessionary periods starting from November 1927 to June 1999, small cap stocks delivered better returns than their large cap stocks fourteen times.
Therefore, there is some merit to selecting micro cap stocks for an investment, if one is ready to accept the risks. And since their performance is tightly linked with the economy, data on this front should also provide some insight. The economy and interest rates have dominated the conversation for more than a year now since rapid interest rate hikes to combat inflation have changed the broader stock market environment when it comes to investing. The latest bit of economic news came in the form of the S&P Global US Flash PMI, which rose to 51 for October and beat its previous high that was set in July. A reading below 50 signals an economic contraction, and the results showed that despite aggressive interest rate hikes, business output remained resilient.
Crucially, the PMI reading comes just days before a highly anticipated data release by the Commerce Department for the state of the U.S. economy during Q3 2023. Polls conducted by Reuters and Bloomberg suggest that the economy might have grown the fastest for the third quarter over the past two years, after the impacts of the coronavirus lock down and rapid inflation start to dissipate.
So, as economic news provides optimism about the future and the stock market, we took a look at micro cap stocks that are popular among hedge funds. The top three hedge fund micro cap stock picks are Magnachip Semiconductor Corporation (NYSE:MX), uniQure N.V. (NASDAQ:QURE), and KalVista Pharmaceuticals, Inc. (NASDAQ:KALV).
12 Best Micro Cap Stocks To Invest In
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Our Methodology
To compile our list of the best micro cap stocks to invest in, we first made a list of the 40 largest micro cap stocks that were rated Buy or better by analysts. This list was then re ranked according to the number of hedge fund investors in the stock as of June 2023, and the top micro cap stocks are as follows.
Gracell Biotechnologies Inc. (NASDAQ:GRCL), as the title suggests, is a biotechnology company. It is headquartered in China and is involved in developing cancer treatments. The firm shared results from a cancer trial in September, with the data showing impressive response rates.
During the second quarter of this year, 11 out of the 910 hedge funds part of Insider Monkey's research had held a stake in Gracell Biotechnologies Inc. (NASDAQ:GRCL). Samuel Isaly's OrbiMed Advisors is the largest shareholder among these since it owns 9 million shares that are worth $34 million.
Along with uniQure N.V. (NASDAQ:QURE), Magnachip Semiconductor Corporation (NYSE:MX), and KalVista Pharmaceuticals, Inc. (NASDAQ:KALV), Gracell Biotechnologies Inc. (NASDAQ:GRCL) is a highly rated micro cap stock that hedge funds are also buying.
Aerovate Therapeutics, Inc. (NASDAQ:AVTE) is a small biotech firm with less than fifty employees. The company is currently developing a drug for high blood pressure. The firm has beaten analyst EPS estimates in only one of its four latest quarters, and its third quarter results saw Aerovate Therapeutics, Inc. (NASDAQ:AVTE) highlight $45 million in cash beefed by a recent share price sale. The firm believes that this will be sufficient to fund operations until 2026.
As of Q2 2023 end, 13 hedge funds among the 910 polled by Insider Monkey were the firm's investors. Aerovate Therapeutics, Inc. (NASDAQ:AVTE)'s biggest investor is Peter Kolchinsky's RA Capital Management as it has invested $141 million in the company.
Oatly Group AB (NASDAQ:OTLY) is a Swedish dairy company that provides plant based products such as oat milk. While it is a penny stock, 22.5% of its shares are owned by institutional investors, and analysts have priced in a $2.25 upside based on the average share price target of $2.75.
Insider Monkey scoured through 13 hedge fund portfolios for their June quarter of 2023 shareholdings and discovered that 13 had bought Oatly Group AB (NASDAQ:OTLY)'s shares. Out of these, the largest shareholder is Anand Parekh's Alyeska Investment Group through its $6 million investment.
Arbutus Biopharma Corporation (NASDAQ:ABUS) is an American healthcare company that is developing treatments for serious diseases such as Hepatitis. Even though it is a micro cap stock, the company has performed well during the current tough economic environment, as it has beaten analyst EPS estimates in three out of its four latest quarters.
As of June 2023, 15 out of the 910 hedge funds profiled by Insider Monkey had held a stake in the company. Arbutus Biopharma Corporation (NASDAQ:ABUS)'s biggest investor is Sina Toussi's Two Seas Capital since it owns $19 million worth of shares.
Aviat Networks, Inc. (NASDAQ:AVNW) is a small telecommunications company that sells switches, routers, and related products. September was a good month for the firm since it won two U.S. government orders that are worth more than $50 million to help build public safety networks.
After digging through 910 hedge fund portfolios for 2023's June quarter, Insider Monkey discovered that 15 had bought and invested in Aviat Networks, Inc. (NASDAQ:AVNW)'s shares. Out of these, the largest stakeholder is Chuck Royce's Royce & Associates courtesy of its $20.2 million stake.
Ranpak Holdings Corp. (NYSE:PACK) is an industrial equipment company that provides machines that enable customers to pack their products. Its financial performance depends on the economy and purchasing power, and the stock is rated Buy on average.
For their second quarter of 2023 investments, 17 out of the 910 hedge funds tracked by Insider Monkey had held a stake in the company. Ranpak Holdings Corp. (NYSE:PACK)'s biggest shareholder in our database is Jonathan Soros' JS Capital through its $137 million investment.
Organogenesis Holdings Inc. (NASDAQ:ORGO) is a medicine company that focuses on making wound management and surgical products. Its shares are also rated Buy on average, and the firm is coming off the back of a withdrawn revenue guidance as it heads to its third quarter results in November 2023.
17 out of the 910 hedge funds part of Insider Monkey's database were Organogenesis Holdings Inc. (NASDAQ:ORGO)'s investors during Q2 2023. Guy Levy's Soleus Capital owns the largest stake among these since it owns 11.7 million shares that are worth $38.9 million.
Magnachip Semiconductor Corporation (NYSE:MX), Organogenesis Holdings Inc. (NASDAQ:ORGO), uniQure N.V. (NASDAQ:QURE), and KalVista Pharmaceuticals, Inc. (NASDAQ:KALV) are some top micro cap stocks.
