3 Cheap Small-Cap Stocks to Scoop Up on the Market Pullback

While today’s widespread selling is knocking major equity benchmarks lower across the board, one of the major trends in July was a rotation out of mega-caps and into small-cap stocks. After a lengthy period of underperformance relative to the rest of the market, the recent rise in small caps can be linked to investors betting on upcoming interest rate cuts amid easing inflationary pressures. 

Lower rates would be a boon for smaller companies, which typically carry more debt than their mega-cap counterparts. Technical analysts have also spotted bullish signals for small caps, as well. Bank of America's (BAC) Stephen Suttmeier recently highlighted that the Russell 2000 Index's (RUT) rally aligns with a wave of small-cap stocks hitting 52-week highs, marking what he calls a "big base breakout." 

However, as small-cap benchmarks retrace their breakout gains, investors may now have an even better buy opportunity. As analysts caution that fundamentals will likely drive the next leg of the small-cap rally, here are three buy-rated ideas from the S&P Small-Cap 600 Index ($IQY) to scoop up now, while they still look affordable. 

Small-Cap Stock #1: Organon & Co

New Jersey-based Organon & Co. (OGN) is a global healthcare leader dedicated to advancing women’s health through its extensive portfolio of over 60 medicines and products. With a market cap of around $5.56 billion, Organon leverages its scale and international presence to drive healthcare solutions across the globe.

Shares of Organon have rallied nearly 45% in 2024, crushing the broader S&P 500 Index’s ($SPX)11.4% return and IQY’s roughly 2% gain on a YTD basis. 

The company currently pays a dividend of $0.28 per share. Its annualized dividend of $1.12 per share translates to an attractive 5.17% dividend yield. Plus, Organon maintains a conservative payout ratio of just 27.27%, leaving ample room for further dividend growth. 

From a valuation perspective, the stock is trading at 5.24 times forward earnings and 0.90 times sales, which is significantly lower than its pharmaceutical industry peers.

Shares of Organon soared 3.6% on May 2 after its Q1 earnings results, which exceeded Wall Street’s estimates. Revenues surged 5.5% year over year to $1.6 billion, primarily driven by a 46.6% annual improvement in revenue from the Biosimilars segment. Additionally, revenue from the Women’s Health segment surged 11% year over year, reaching $421 million. 

Adjusted EPS of $1.22 climbed 13% annually and smashed Wall Street’s forecasts by an impressive 30.6% margin. As of March 31, Organon held $575 million in cash reserves. 

For fiscal 2024, management projects total revenue to range between $6.2 billion and $6.5 billion, while adjusted EBITDA margin is anticipated to land between 31% and 33%. 

Investors should note that the company is slated to report its fiscal Q2 earnings results before the market opens on Tuesday, Aug. 6, which could result in some event-related volatility in the stock early next week. 

Analysts tracking Organon project the company’s profit to climb 3.9% year over year to $4.25 per share in fiscal 2024 and rise another 1.4% annually to $4.31 per share in fiscal 2025. 

Overall, OGN stock has a consensus “Moderate Buy” rating. Out of the seven analysts covering the stock, two recommend a “Strong Buy,” four suggest a “Hold,” and one has a “Moderate Sell” rating.

Even though the stock trades nearly flat with its average analyst price target of $21.29, the Street-high price target of $27 suggests that OGN could rally as much as 29.5% from current levels.

Small-Cap Stock #2: PHINIA 

Valued at a market cap of $2 billion,Michigan-based PHINIA Inc. (PHIN), formerly known as BorgWarner, is a leading force in the auto parts supply market, with over 100 years of expertise in premium solutions and components. With iconic brands like Delphi, Delco Remy, and Hartridge, PHINIA is a key player in both commercial and light vehicle markets. The company specializes in fuel and electrical systems that ensure peak engine performance, including advanced technologies for alternative fuels.

Shares of PHINIA have rallied 41.7% YTD, outperforming the SPX and IQY.

On Aug. 1, PHIN declared a quarterly dividend of $0.25 per share, payable to its shareholders on Sep. 13. Its annualized dividend of $1.00 translates to an attractive 2.28% dividend yield. 

The company also announced a significant expansion of its share repurchase strategy, boosting the existing $150 million program by $250 million. This brings the total repurchase capacity to approximately $263 million, highlighting a strong commitment to shareholder value.

Priced at 10.34 times forward earnings and 0.56 times sales, the stock is trading much lower than its industry peers. 

Following the company’s Q2 earnings results after the close on July 30, shares of PHINIA surged 6.8% in the next trading session. While the company’s total revenue of $868 million during the quarter dropped slightly year over year, the aftermarket segment showcased impressive resilience, with revenue soaring 4.2% annually.  

PHINIA’s adjusted EPS stood at $0.88, short of estimates. At the end of the quarter, the company held $339 million in cash and cash equivalents, with an additional $499 million available from its revolving credit facility. 

CEO Brady Ericson noted, “Our top line reflects solid performance from our Aftermarket segment, particularly in Europe, offset by weaker CV sales in Europe and lower LV sales in China, due to challenging macro conditions for our Fuel Systems segment. Our cash generation remains healthy, with adjusted free cash flow of $108 million in the quarter and $121 million year to date.”

For fiscal 2024, management forecasts net sales to range between $3.42 billion and $3.58 billion, with adjusted sales expected to range from $3.40 billion to $3.55 billion. Additionally, adjusted free cash flow is forecasted to be between $160 million and $200 million. 

Wall Street’s view on lightly covered PHIN stock is bullish, with a unanimous "Strong Buy" rating among the two analysts in coverage.  

The stock is trading slightly below its average price target of $43, but the Street-high price target of $50 suggests that PHIN could rally as much as 17.4% from current levels.

Small-Cap Stock #3: The Cheesecake Factory 

Valued at roughly $1.9 billion by market cap, California-based The Cheesecake Factory Incorporated (CAKE) is a culinary powerhouse with restaurants and bakeries across the U.S. and Canada. From crafting cheesecakes and baked goods for its own venues to serving international licensees and third-party clients, the company is a leader in both dining and dessert. Its diverse brand portfolio includes The Cheesecake Factory, North Italia, and Flower Child. 

Shares of Cheesecake Factory have underperformed, and are almost unchanged on a YTD basis. 

In terms of valuation, the stock is trading at 12.29 times forward earnings and 0.58 times sales, which is lower than both its industry peers and its own five-year averages.

On July 31, Cheesecake Factory announced its Q2 earnings results alongside a quarterly dividend of $0.27 per share, set to be distributed to its shareholders on Aug. 27. This brings its annualized dividend to $1.08, offering a solid 2.93% dividend yield. In Q2, the company also invested $3.9 million in share repurchases.

Despite a topline miss in the latest quarter, the company’s total revenue of $904 million climbed 4.4% year over year. Adjusted EPS for the quarter jumped 23.9% annually to $1.09, and topped estimates by a 9% margin. 

As of July 2, the company’s liquidity was strong, with a total of $277.2 million, including $40.7 million in cash and $236.5 million available on its revolving credit facility. During the quarter, Cheesecake Factory expanded its footprint with five new openings: one Cheesecake Factory, one North Italia, two Flower Child spots, and one Culinary Dropout. Internationally, Cheesecake Factory made its debut in China under a licensing agreement. 

In fiscal 2024, management plans to open 22 new restaurants, including three Cheesecake Factory locations, six to seven North Italia spots, six to seven Flower Child eateries, and seven to eight additional Fox Restaurant Concept venues.

Analysts tracking Cheesecake Factory project the company’s profit to improve 17.8% year over year to $3.17 per share in fiscal 2024 and rise another 10.4% annually to $3.50 per share in fiscal 2025. 

Overall, CAKE stock has a consensus “Moderate Buy” rating. Out of the 16 analysts covering the stock, six recommend a “Strong Buy,” one suggests a “Moderate Buy,” six advise “Hold,” and the remaining three maintain a “Strong Sell” rating.

The average analyst price target of $40.36 indicates a potential upside of 15.9% from the current price levels. The Street-high price target of $50 suggests that CAKE stock could rally as much as 43.7%.