We recently published a list of 8 Most Undervalued Small-Cap Stocks To Buy According To Analysts. In this article, we are going to take a look at where Webster Financial Corporation (NYSE:WBS) stands against the other most undervalued small-cap stocks to buy according to analysts.
Is a Multi-Year Small-Cap Cycle Ahead?
The landscape for small and mid-cap companies is becoming increasingly exciting in light of the Fed’s recent rate cuts, which could unlock significant investment opportunities. While the Russell 2000 index has lagged behind larger averages, analysts are optimistic about the growth potential of these stocks as market conditions improve.
Many small and mid-cap companies are well-positioned to capitalize on the favorable economic environment, with innovative strategies and strong fundamentals that can drive demand and market share. As interest rates stabilize and investor confidence grows, these companies are likely to attract renewed attention from investors seeking high-growth opportunities.
With the current environment ripe for exploration, there has never been a better time for investors to consider small and mid-cap stocks. Such was the sentiment of Curtis Nagel, senior US SMid cap internet analyst at BofA Securities, who spoke on this market scenario on CNBC earlier. We covered his opinion in another one of our articles, 7 Best Small Company Stocks To Invest In. Here’s an excerpt from it:
“…he believes this could spell big opportunities for SMID-cap stocks across various sectors, including home furnishings and subscription services.
Nagel specifically pointed out Restoration Hardware, noting that it is a household name that often flies under the radar… Nagel’s overall thesis focuses on updating price targets for companies with high sensitivity to interest rates and strong prospects for revenue and earnings growth in a soft landing scenario. ACV Auctions was highlighted as an intriguing opportunity. Nagel described it as a digital marketplace for wholesale vehicles where dealerships trade cars. He noted that this market has not been fully digitized yet, placing the company at the forefront of this transition. Although the wholesale vehicle market has faced challenges, down about 25% relative to historic averages, Nagel theorized that as interest rates improve and car affordability increases, the company could see a market rebound. He views this stock as potentially overlooked but having significant upside.”
In an interview on CNBC on September 30, Nancy Prial, Co-CEO & Senior Portfolio Manager at Essex Investment Management, expressed that she expects small-cap stocks to grow, driven by rate cuts and stock-picking opportunities.
Prial noted that small caps have been outperforming in the third quarter, largely driven by expectations of rate cuts, with a 50 basis point reduction being more significant than previously anticipated. She expressed optimism that small caps have substantial room to grow, emphasizing that this could mark the beginning of a multi-year cycle for these stocks. Currently, small-cap stocks are underrepresented in the market, comprising just under 5% of the total equity market, which is at record lows. This low ownership level presents an attractive opportunity for investors.
She pointed out that small-cap stocks remain significantly undervalued compared to their larger counterparts. Prial argued that for small caps to gain traction, several conditions must be met: the continuation of rate cuts, confidence in navigating a soft landing rather than a recession and expanding relative earnings growth. She noted that relative earnings growth for small caps is starting to improve and is expected to surpass that of large caps by the end of the year.
When asked about overall market estimates, Prial acknowledged that while the S&P 500 is projected to see earnings growth of 13% in the fourth quarter and 15% in 2025, she believes small caps could exceed these figures. Despite a slight slowdown in economic growth, she maintained that small-cap stocks could achieve earnings growth rates between 15% and 20% next year. She cautioned, however, that overall indices might not reflect this growth as estimates often start high before being revised downward.
Prial also discussed her investment picks related to infrastructure and near-shoring, specifically mentioning Clean Harbors. While acknowledging its strong performance in Q3, she clarified that they do not expect new legislation from Washington to drive further gains. Instead, she believes companies like this will benefit from existing bills that are now being implemented. Additionally, she highlighted Arcosa as a “picks and shovels” play within the sector, emphasizing its role in supporting the build-out of artificial intelligence infrastructure and digitalization efforts across various industries.
Her insights reflect a bullish outlook on small-cap stocks amid changing economic conditions and anticipated monetary policy shifts. By focusing on strategic stock selection and recognizing the potential for earnings growth within this sector, investors may find compelling opportunities as they navigate the evolving market landscape.
Methodology
We used stock screeners to look for companies trading between $1 billion and $10 billion, that’s our definition of small-cap stocks. We then found 25 stocks with a forward price-to-earnings ratio under 15, and an upside potential of over 20%. We then selected the 8 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of their analysts’ upside potential.
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 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A close up of a hand pressing a mobile banking app displayed on a tablet or smartphone.
Webster Financial Corporation (NYSE:WBS)
Forward Price-to-Earnings Ratio: 7.78
Average Upside Potential: 28.15%
Number of Hedge Fund Holders: 42
Webster Financial Corporation (NYSE:WBS) is an American commercial bank that has 177 branches and 316 ATMs. It offers a range of financial products and services, including commercial banking, retail banking, wealth management, and investment banking, and is focused on providing personalized service and tailored solutions to its customers, both individuals and businesses.
Management reported a year-over-year decline of 8.71% in revenue for Q2 2024, amounting to $614.60 million. Despite the decline, a major announcement this quarter was a new joint venture with Marathon Asset Management. The joint venture will enhance the company’s balance sheet flexibility, expand its offerings, and allow it to better serve its clients. The company plans to launch the joint venture in Q4 2024 or Q1 2025.
The company is making several improvements to remain competitive and grow its business, including investing in technology, expanding its product offerings and improving its efficiency. These initiatives are expected to help the company enhance its digital experience, offer new products and services to its customers, reduce costs, and increase profitability.
Webster Financial Corporation (NYSE:WBS) demonstrates a strong financial foundation and a diversified business model. Its balanced loan portfolio and strategic management of its deposit base position it for continued growth and profitability, making it a rather attractive investment opportunity.
Diamond Hill Select Strategy stated the following regarding Webster Financial Corporation (NYSE:WBS) in its first quarter 2024 investor letter:
“Among our bottom Q1 contributors were Humana, Extra Space Storage and Webster Financial Corporation (NYSE:WBS). Self-storage real estate investment trust (REIT) Extra Space Storage and HSA-focused bank Webster Financial performed well at the end of 2023 as investors anticipated interest rate cuts and easier financial conditions in 2024. As this sentiment largely reversed in early 2024 against a resilient economic backdrop and still-elevated interest rates, real estate (and REITs broadly) and banks were pressured in Q1 (though it’s worth noting Webster Financial shares were modestly positive in the quarter). However, we believe Extra Space Storage has a high-quality, long-term franchise with an industry-leading operating platform that should position it well in the future. Similarly, we believe Webster Financial’s large HSA account platform and diverse deposit base is a strong competitive advantage in the current macroeconomic environment.”
Overall WBS ranks 6th on our list of most undervalued small-cap stocks to buy according to analysts. While we acknowledge the growth potential of WBS as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than WBS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
