History Says Small-Cap Growth Stocks Could Soar: Here Are 2 to Buy Now

John Ballard, The Motley Fool

Tue, Oct 15, 2024, 4:45 AM 5 min read

Small caps have historically trounced the return of the S&P 500 coming out of bear markets, but since the end of the most recent downturn in 2022, the small-cap focused Russell 2000 is up 24%, while the large-cap weighted S&P 500 is up 50%. This runs counter to the Russell 2000's performance in previous bull markets. In the five-year period following the 2002 and 2008 bear markets, the Russell 2000 outperformed the S&P 500 by an average of 61%.

The returns of different asset classes and even specific industries can follow patterns that are tied to broader economic trends, such as interest rate cycles or consumer spending patterns. But if a company shows strong growth, its share price will certainly climb over the long term.

Small-cap stocks will have their day in the sunshine again. These are relatively small companies that have a market capitalization (the share price multiplied by total shares outstanding) below $2 billion with lots of room to expand in their respective industries. To aid you in your search, here are two promising stocks to consider buying today.

1. SoundHound AI

The rapid adoption of artificial intelligence (AI) is changing how people interact with devices -- even their cars. SoundHound AI (NASDAQ: SOUN) is still a small company but is emerging as a leader in voice recognition technology. It is poised for substantial growth with over 155 patents and an impressive list of customers that includes major brands in the restaurant, retail, and auto industries.

SoundHound Chat AI is already providing conversational voice assistance in many devices. Its voice recognition technology combines with leading large language models like OpenAI's ChatGPT to deliver comprehensive answers to questions. Validation of its technology can be seen in its growth so far, with revenue up 54% year over year in the second quarter.

The company is looking to expand across several industries with its technology, including healthcare and insurance. It just bought a leading enterprise software provider, Amelia, for $80 million to accelerate its market expansion, and it also has a valuable partnership with AI chip leader Nvidia to provide generative-AI chat capabilities in cars powered by Nvidia DRIVE.

For investors looking for a small-cap stock to hold for wealth-building return potential, SoundHound looks very promising. The stock has been quite volatile over the last few years, but it has a market cap of just $1.7 billion, which could significantly undervalue its opportunity in a generative AI market that Statista projects to reach $356 billion by 2030.

2. Archer Aviation

Another market ripe for big returns is the burgeoning air taxi market. This is a small but fast-growing field that Morgan Stanley projects will reach $1 trillion by 2040. Archer Aviation (NYSE: ACHR) has a market cap of just $1.1 billion, and several recent developments are pointing to a bright future.

Archer is not generating any revenue yet, since it is currently waiting on final certification from the Federal Aviation Administration (FAA) to start operating, but it is getting close. The company has already received certification to operate commercial flights so it can prepare to launch its Midnight aircraft for major airlines.

Once the certification process is completed, Archer should move rapidly. Earlier this year, it signed a memorandum of understanding to develop electric air-taxi networks in California for Southwest Airlines. It also has an agreement for the conditional purchase of up to $1 billion worth of aircraft by United Airlines.

Archer also has a purchase agreement of up to $580 million worth of aircraft by Future Flight Global with an initial deposit already paid.

Those developments come on top of two contracts it signed with the U.S. Air Force in August 2023 worth up to $142 million. The Department of Defense also recently approved Midnight's airworthiness for the military, further validating Archer's opportunity.

To pay manufacturing costs, the company has a contract with Stellantis to provide about $400 million of funding. This will allow it to cover labor costs at its Georgia factory through 2030. All these developments are pointing to a bright future for Archer Aviation, and investors have the chance to get in while the stock is down.

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John Ballard has positions in Nvidia and SoundHound AI. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Southwest Airlines and Stellantis. The Motley Fool has a disclosure policy.

History Says Small-Cap Growth Stocks Could Soar: Here Are 2 to Buy Now was originally published by The Motley Fool

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