Cathie Wood doubles down on these 2 small-cap stocks ⁠— here’s why you might want to ride her coattails

The stock market might be showing some wobbly signs as of late, but the general overall trend has been up this year, with investors showing more appetite for risk.

Risk generally comes with betting on smaller names and moving forward, Bank of America thinks that over the coming decade, small caps are primed to surge ahead of the broader market.

“If you buy small caps today based on current valuations,” said Jill Carey Hall, BofA’s head of US small- and mid-cap strategy, “the annualized returns for small caps over the next decade could be in excess of 10%.” That’s about double the annual gains Hall sees the S&P 500 generating over the same period.

That could be good news for Cathie Wood. Known for a risk tolerant style and favoring both large-and small-caps so long as they are disruptors, Wood has been loading up recently on two small-cap names. The interesting part about these stocks is that while they are showing big year-to-date gains, they are still down significantly over the past year. We ran them through the TipRanks database to see what makes them appealing investment choices right now.

Accolade, Inc. (ACCD)

First up on our Wood-backed list is Accolade. With a market-cap of $853 million, this small-cap offers a healthcare management platform for enterprises and other customers. Navigating the U.S. healthcare system is no easy task, and Accolade was formed with a mission to enable companies and organizations to offer their staff members a complete platform that gathers all of their healthcare data into a single, integrated system. The company’s approach is to find the right mix between tech-enabled solutions while also providing health assistant services when needed.

In January, the company released financial results for the fiscal third quarter of 2023 (November quarter). At the top-line, revenue rose by 9% year-over-year to $90.9 million, beating the Street’s call by $3.37 million. EPS also came in ahead of the forecast – at -$0.56 vs. the -$0.62 anticipated. For the full fiscal year, the company sees revenue hitting the range between $361 million and $365 million. Consensus had $362.35 million.

Loss-making stocks were seriously out of bounds in 2022, and while ACCD shares are up by 47% year-to-date they are still down by 42% over the past 12 months.

Cathie Wood must think the healthcare disruptor offers good value right now. Via her ARK Genomic Revolution ETF fund (ARKG), she has purchased so far this month 355,905 shares, bringing her total holdings to 5,788,769 shares. These are now worth more than $66.5 million.

Mirroring Wood’s confidence in Accolade, Raymond James analyst John Ransom thinks the latest print offers plenty to be upbeat about and has put to rest many prior concerns.

“Macro concerns have been an overhang on the stock since the end of 2021, but the recent F3Q print, which featured a resilient top-line ($90.9M vs. consensus of $87.5M) and record selling season (ARR bookings +30% y/y), allayed anxiety surrounding churn and prompted a ~25% stock rebound. With an average gross dollar retention of ~98% in the last five years, combined with a recurring revenue base, estimated 20% revenue growth, and opportunities for operating leverage given ~48% gross margins, we think that there is solid visibility into the P2P (path to profitability),” the 5-star analyst opined.

Summing up, Ransom wrote, “We think the valuation, strong F3Q results, balance sheet, and easy-to-grasp path to profitability (P2P) offer an attractive set-up, especially if the market edges back into ‘risk-on’ mode.”

Accordingly, Ransom rates ACCD shares an Outperform (i.e. Buy), while his $15 price target suggests shares will climb 30% higher over the next 12 months. (To watch Ransom’s track record, click here)

Looking at the consensus breakdown, based on 6 Buys vs. 5 Holds, the stock claims a Moderate Buy consensus rating. The average target currently stands at $13.25, implying the shares have room for ~15% growth over the coming months. (See Accolade stock forecast)

Velo3D, Inc. (VLD)

For the next Wood-endorsed small-cap, we’re looking at a different type of disruptor. With a market cap of $584 million, Velo3D is a company that manufactures and sells 3-D printers. But not just any printers; its line of industrial 3D printers are sold to companies that make their own metal parts. The unique selling point is that engineers can create the intricate, mission-critical parts they need with the help of Velo3D’s cutting-edge, fully integrated metal additive manufacturing solution without sacrificing design, reliability, or performance. You might not have much need for Velo3D’s solutions at home, but they are being used by some of the most innovative companies around such as SpaceX, Honeywell, and Lam Research.

In the Q3 report released last November, revenue increased by a robust 119.5% year-over-year to $19.1 million. The company touted its strong demand, pointing to the $27 million in new bookings and a backlog of $66 million. However, citing shipment delays, and potential supply chain and production snags, the company lowered the 2022 revenue forecast from $89 million to between $75 million to $80 million.

That said, while the company is expected to report Q4 earnings sometime in March, it recently announced preliminary unaudited Q4 and full-year results and said that for the full year, revenue will be in the range between $80 million to $81 million. Q4 revenue is now anticipated to be in the $29 million to $30 million range, above the prior $24 to $29 million forecast.

The extent of VLD’s miserable 2022 can be seen via the fact that while the shares have gained 77% so far this year, they are down by 55% over the past 12 months.

When Cathie Wood is convinced in a name, she is not shy about showing her hand. She evidently strongly believes in VLD’s prospects. Wood scooped up VLD shares in 8 consecutive sessions recently and so far this year has purchased 567,328 shares via her ARK Autonomous Technology & Robotics fund (ARKQ). She currently holds a total of 6,714,593 shares overall. These are worth north of $21.2 million.

This company had caught the eye of William Blair’s Brian Drab, who is unequivocal in his praise.

“The company has made significant technology and manufacturing advancements in the last two years and continues to gain market share,” Drab said. “We continue to gather positive feedback on Velo3D’s technology from extremely sophisticated manufacturing customers using the machines for aerospace and general industrial applications. We expect the company to generate greater than 50% revenue growth in 2023, along with gross margin improvement throughout the year as supply chain challenges subside and manufacturing continues to be streamlined.”

These comments form the basis for Drab’s Outperform (i.e. Buy) although the analyst has no fixed price target in mind. (To watch Drab’s track record, click here)

VLD has slipped under most analysts’ radar; the stock’s Moderate Buy consensus is based on just two recent ratings; Buy and Hold. The forecast calls for 12-month gains of ~16%, considering the average target stands at $3.70. (See VLD stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.

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