After the meteoric rise and fall of growth stocks following the pandemic, Wall Street has kept the sector at arm’s length for over two years now. Understandably so, with economic uncertainty still looming as interest rates remain elevated for the foreseeable future. However, while the broad brush paints a gloomy picture, a closer look reveals a select few small-cap growth stocks bucking the trend. And for investors who can identify them early, the rewards could be tremendous in the long run.
Of course, the environment for growth investing remains challenging, and the recent indiscriminate sell-off has thrown out some high-quality babies with the bathwater. However, investors who can spot the difference stand to generate market-beating returns over a multi-year horizon. The key is distinguishing temporary headwinds from structural declines and identifying sectors where innovation and technological disruption are driving rapid growth.
I believe now is the perfect time to scoop up these names before the crowd and Wall Street jump on the bandwagon. If these companies execute as I expect them to, investors buying at today’s levels could realize significant upside as their fundamentals catch up with market expectations.
Redwire (RDW)
Redwire (NYSE:RDW) is a space infrastructure stock that continues to fly under the radar. It has been trading sideways for well over a year, hovering around the $2.50 level. However, I believe all that could change soon, as its financials have remained strong, and the company beat Wall Street estimates with hefty margins in its latest earnings report. Naturally, the space industry is speculative and risky, but with Redwire, much of that risk seems priced in already, given its low price-sales multiple. This discount is partly due to its high debt load, but I expect that once interest rates start to ease, the company’s valuation has room to move higher. Moreover, Redwire’s acquisitions could start paying dividends around that timeframe.
While profitability has not yet been realized, Redwire is projected to continue growing rapidly. I believe that once rates decline, profitability is within reach. Historically, space stocks have traded at a premium, and many of RDW’s peers, like Virgin Galactic (NYSE:SPCE) and SpaceX, sport astronomical valuations despite having no profits.
All things considered, Redwire offers a relatively discounted entry point into the high-flying space sector. If the company continues to execute well, Redwire could potentially re-rate substantially when macro conditions improve. For investors with more speculative portfolios, this under-the-radar name might merit a closer look. The Wall Street consensus price target of $7 per share implies 176% upside in one year.
Ammo Inc (POWW)
The recent escalation of global conflicts has been tragic, but it has unlocked a boom for arms producers and military suppliers. Backlogs for these companies are expanding exponentially as the rise in geopolitical tensions continues stoking demand. However, for investors looking for multibagger upside, many established players in the defense sector won’t suffice. These mature companies generally offer stable growing dividends over multi-year holding periods rather than explosive share price appreciation.
For exposure to the geopolitical situation coupled with big growth potential, Ammo Inc (NASDAQ:POWW) fits the bill. The ongoing trench warfare and urban combat company is seeing tremendous ammunition demand.
Ammo Inc. is one of the few smaller suppliers prepared to help address that demand. While Ammo Inc. no longer discloses its backlog due to probable national security concerns, its last reported figure before the wars exceeded its current market cap. Personally, I expect that metric has likely ballooned massively since then. Even if conflicts ceased immediately, restocking ammunition inventories to target levels would take many years.
Thus, in my opinion, Ammo Inc. may start blowing away estimates and deliver outsized returns for a while. Among military suppliers, this is a name growth investors should have on their radar. The sole latest Wall Street price target on the stock is $3.50, implying 64% upside. I believe POWW stock can easily deliver triple-digit gains.
CarParts.com (PRTS)
CarParts.com (NASDAQ:PRTS) is another auto part retailer riding industry tailwinds. With the average U.S. passenger vehicle now 13.6 years old and crimes like carjacking rising, demand for car parts is heating up.
Unfortunately, CarParts.com’s financials haven’t yet caught up to these trends, but analysts forecast improved execution will help the company take off over the coming years. Currently, PRTS stock is hovering around pre-pandemic levels, but profits are expected by 2026, along with rapidly expanding earnings afterward.
Looking ahead to estimated 2026 earnings, the company’s current market cap implies a forward price-to-earnings ratio of just 4.7-times. Based on projected 2032 earnings, that multiple falls under 1.5-times. Annual revenue growth is also estimated at around 12% this decade. And with its forward price-to-sales ratio already at 0.27-times, I believe substantial multiple expansion upside lies ahead once execution improves. The upside potential in one year is 106%, according to Wall Street analysts, with a $6.60 price target.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
