We recently compiled a list of the 10 Best Small-Cap Stocks Ready To Explode.In this article, we are going to take a look at where Arcos Dorados Holdings Inc. (NYSE:ARCO) stands against the other small-cap stocks.
Prospects For Extended Outperformance Of Small-Cap Stocks
On October 7, Chuck Royce, founder and Senior Advisor, and Francis Gannon, Co-Chief Investment Officer and Managing Director of Royce Investment, discussed the outperformance of small-cap stocks. While discussing the reasons that led to the Russell 2000 Index doing well in Q3 '24, Gannon noted that the strong performance of the Russell 2000 Index, which was up 9.3%, in the third quarter of 2024 can be attributed to a "quintessential reversion to the mean," as small-caps had lagged behind larger companies for an extended period. He thinks that the rebound was not surprising given the historical trends, as the small-cap index outperformed the large-cap Russell 1000, up 6.1%, and the mega-cap Russell Top 50, up 4.2% during this time.
On the other hand, Royce mentioned that he was surprised by the concentration of the small-cap gains. He noted that all the gains for the quarter were compressed at the start, as by early July 16, the index had already achieved a 10.6% increase from the end of June, marking its high for the quarter. Royce further mentioned that this rapid ascent was followed by a notable decline, with the index dropping 10.1% from July 16 to August 7 before recovering most of its losses by the end of September. Despite this volatility, he expressed satisfaction with the small-cap performance overall for the quarter, especially since it marked a reversal after small-caps last outperformed large-caps in Q4 2023.
Building further upon the volatility of small-cap stocks, Royce expressed that while volatility in small-cap stocks can be concerning, it is a normal part of investing in this asset class. He emphasized that they welcome volatility as it allows them to take advantage of price fluctuations for long-term gains. Historically, significant intra-year declines are common for small-caps, with the Russell 2000 experiencing double-digit pullbacks in 22 out of the last 25 years.
While answering how the sector can sustain its market leadership performance, Gannon highlighted that market breadth among large caps often leads to better performance for small caps. He pointed out that when the equal-weighted Russell 1000 outperformed its capitalization-weighted counterpart, small-caps typically led in performance. This trend suggests that an expansion of returns across different sectors is a positive indicator for small-cap stocks.
Moreover, both Royce and Gannon stressed that earnings growth is crucial for the long-term success of small-cap stocks. Gannon stated that while short-term market psychology can influence stock prices, consistent earnings are fundamental for sustaining long-term performance. He noted that despite a significant portion of small-cap companies lacking earnings, around 44.6%, those with earnings are expected to grow faster than their large-cap counterparts in 2025.
Our Methodology
To curate the list of 10 best small-cap stocks ready to explode we used the Finviz stock screener and CNN. Using the screener we shortlisted small-cap stocks (market-cap between $500 million to $2 billion) for which analysts are expecting more than 50% upside from the current stock price. Once we had shortlisted the stocks we cross-checked the analysts' upside potential from CNN. Lastly, we ranked the stocks based on the ascending order of the analyst upside potential. Please note that the data was recorded on November 15, 2024.
Why do we care about what hedge funds do? 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 customers ordering from a McDonald's restaurant in Latin America.
Arcos Dorados Holdings Inc. (NYSE:ARCO) is the largest independent franchisee of McDonald's in the world, primarily operating in Latin America and the Caribbean. The company has the exclusive rights to own, operate, and franchise McDonald's restaurants in 20 countries across Latin America and the Caribbean, including major markets like Brazil, Mexico, and Argentina. It manages over 2,140 McDonald's locations and employs more than 100,000 people.
During the fiscal third quarter of 2024, Arcos Dorados Holdings Inc. (NYSE:ARCO) demonstrated strong performance, showcasing the resilience of its business model despite economic challenges. The company achieved a new record high revenue for the third quarter which amounted to $1.1 billion and was up 39% year-over-year in constant currency. The increased revenue was due to a 32.1% rise in system-wide comparable sales, with positive contributions from both average check and guest volumes.
Arcos Dorados Holdings Inc. (NYSE:ARCO) has implemented a 3D policy that translates to focusing on Digital, Delivery, and Drive-thru. As a result of this policy, the company was able to increase its sales from digital channels by 16% year-over-year. Digital sales now account for 58% of total systemwide sales, reflecting a strong customer preference for online ordering and mobile app functionalities.
It is one of the best small-cap stocks ready to explode. Analysts’ 12-month median price target for the stock presents a 53% upside from current levels.
Overall ARCO ranks 9th on our list of the best small-cap stocks to buy. While we acknowledge the potential of ARCO as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for a promising AI stock that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
