Mega-caps have been in the spotlight, but the so-called Trump trade is making America great again for small cap stocks. Some could be attractive takeover targets for flush private equity firms.
By Hank Tucker, Forbes Staff
Donald Trump won the presidency and Republicans took control of the Senate last week in part by constantly reminding Americans of how much more they’ve paid for basic groceries during the last four years of high inflation, so it may come as a surprise that one of the fastest-growing small-cap companies in the U.S. sells the most expensive eggs in the supermarket.
Since it was founded in 2007 in Austin, Texas, Vital Farms has effectively created and dominated the market for pasture-raised eggs and now sells eggs from about 375 family farms which provide each hen with at least 108 square feet of land and time outdoors every day. The more humane practices come with a cost that gets passed on to the consumer: a carton of a dozen standard Vital Farms eggs starts at around $6 or $7, and its most premium organic eggs can fetch as much as $10 or $11.
“I learned in business school that if all you do is make a commodity and you have the highest-priced version of that commodity, you’re going to lose, but somehow we’re winning,” says CEO Russell Diez-Canseco. “I think it’s because we’re doing more than just selling an egg. We’ve created a brand around the way we produce food…. We have a lot of avid fans, people who would tell you that they won’t buy any other egg.”
Every Vital Farms carton tells the buyer which farm its eggs came from, an impossibility for most of the industry with an opaque wholesale market, but the company isn’t just a morality play for animal lovers. Customers report that its eggs have thicker shells with yolks that are a brighter orange and stand taller in the pan.
Its numbers back up those claims. Vital Farms’ $576 million in sales in the last 12 months are up 29% from the previous year and represent 8% of the total U.S. egg market. More notably, its $50 million in net income in that span is up almost 150% as lower commodity prices improved margins. That rise in profitability has helped its stock more than double in the last year, almost erasing a 70% drop in the three years following its August 2020 IPO.
“Within a year of their IPO, corn prices and soy prices shot up,” says Ben Klieve, an analyst at Lake Street Capital Markets. “Growth wasn’t an issue, it was an issue of revenue growth translating into earnings growth.”
Vital Farms is one of many small caps making a comeback in 2024 after years of underperformance and is No. 2 on Forbes’ annual list of America’s Most Successful Small-Cap Companies. The Russell 2000 index is up 17% this year—still lagging behind the S&P 500 index’s 25% gain and still trailing its 2021 record highs—but the start of the Federal Reserve’s interest rate cuts in September started to accelerate the index’s rally, and the category showed more life following last week’s election as well.
The Russell 2000 leaped 5.8% last Wednesday and has sustained most of those gains, with investors hopeful that small companies will benefit from Trump policies like lower taxes and deregulation. Small caps which tend to be more domestically focused, may also have some immunity from the tariffs Trump is promising.
“It’s a generational opportunity to buy small-cap stocks,” says Ken Farsalas, portfolio manager of the Oberweis Small-Cap Opportunities Fund, with $982 million in assets and a 15.2% 10-year annualized return. “You have to go all the way back into the mid- to late-1990s to see the valuation disparity between small caps and large caps that we see today.”
Quality matters, though. Farsalas notes that around 40% of the small-cap universe is populated with unprofitable companies, many of which are weighing on the index’s returns. Investors would be well-served to separate the haves from the have nots.
To compile the list of the 100 best this year, Forbes analyzed 914 companies with market capitalizations between $300 million and $2 billion—the largest companies in the Russell 2000 have grown out of that range, and in fact some stocks now exceed $10 billion, though the median market cap in the index sits at around $1 billion. We excluded those larger names and also filtered out companies which had share prices below $5 or whose revenues declined in the last 12 months. Then, we ranked the remaining 322 stocks based on stock return, sales growth, return on equity and earnings growth over the last 12 months and the last five years, with more weight given to recent data. Financial institutions, REITs, utilities, royalty trusts and limited partnerships were excluded.
The No. 1 company on the list is El Monte, California’s Gigacloud Technology, a logistics software firm which has surged 130% in the last year, though its volatility is high and it has lost half its value since March. Two short-seller reports have targeted the company since last September questioning low traffic to its website and conflicts of interest surrounding a web of related entities, claims the company has rebutted. Gigacloud has posted sales of $1.1 billion in the last year, growing 90% year over year, and trades at an unusually low multiple of seven times earnings.
All four of Gigacloud’s research analysts have a buy rating on the stock, and founder and CEO Larry Lei Wu believes the company is misunderstood by the skeptics. A former executive at Chinese online education firm New Oriental Education & Technology Group, Wu started Gigacloud as a software outsourcing company in 2006, pivoted to e-commerce for big and bulky items in 2011 and thinks he struck gold with another shift to a B-to-B marketplace model that launched in 2019.
Today, Gigacloud sells some of its own products, primarily furniture items, wholesale to resellers like Amazon, Wayfair and Walmart, and operates a marketplace that links more than 1,000 suppliers to 8,500 corporate buyers. Wu contends that retailers waste far too much space storing large items like sofas, which often get shipped from a supplier’s warehouse to the retailer’s warehouse before making it inside a buyer’s home. By connecting retailers to manufacturers on its platform for a fee, products can travel straight to a customer.
“The product can travel directly to you, rather than going through the retailer’s warehouse, which we believe is redundant,” says Wu. “If we can do that, we’re saving money for everybody.”
Gigacloud’s set up makes it easier for manufacturers to project sales when they supply sofas to dozens of resellers than it is when they have to rely on individual retailers forecasting how many couches they will sell in a given month. Gigacloud has a Hong Kong office and could be adversely affected by the prospect of a trade war—its shares are down since the election—but Wu says the majority of its products are now shipped from outside of China.
Rounding out the top three on the list is Miller Industries, a heavy-duty tow truck and recovery equipment manufacturer based in Ooltewah, Tennessee, a small town near Chattanooga. The amount of time Americans spend behind the wheel is rising again after a drop during Covid, resulting in more congestion on the road and more accidents. Miller Industries has taken advantage of the increased need for its vehicles, reaching $1.3 billion in annual revenues. Its shares have tripled since reaching a low point in the summer of 2022.
Few companies on the list are recognizable to anyone but the most astute investors, but more than a third have at least doubled in share price in the last year, beating giants like Tesla, Amazon and Apple. Particularly among profitable companies, many will grow to become next year’s midcaps and large caps, and a better dealmaking environment following Trump’s win could also help small caps reward investors by becoming acquisition targets.
“Private equity is bursting at the seams with excess capital that they have to put to work,” says Farsalas. “I would argue that money needs to find a home, and the small-cap public equity market is a good place to start.”
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