Small-cap growth stocks have badly underperformed the broader markets since the start of the third quarter of 2023. For example, the Vanguard Small Cap Index Fund has lost 10.3% of its value over this period, while the S&P 500 has gained approximately 8% in total value (including dividends).
However, with the Federal Reserve seemingly poised to pivot on interest rates by mid-2024, small-caps may be gearing up for a trend reversal. If true, some of the worst-performing small-caps over the prior two years could become next year's big winners.
Which low market-cap growth companies might be worth taking a flier on ahead of the Fed's eventual pivot on interest rates? Cannabis titan Tilray Brands (TLRY 1.71%) and urban air mobility company Archer Aviation (ACHR 1.00%) both sank like stones once the Fed signaled the end of the era of easy money in 2021.
Nonetheless, each company sports an intriguing underlying value proposition that may appeal to risk-tolerant investors. Read on to find out more about these two potentially undervalued small-cap growth stocks.
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Staying power as a moat
Tilray Brands, a Canadian cannabis and consumer packaged goods company, has lost a staggering 84% of its value over the past two years. The unfavorable dynamics of the fledgling Canadian cannabis market have weighed on its shares over this period.
To counterbalance this titanic weight, management has diversified into craft alcohol and beer through a series of acquisitions. The company has also increased its market share in the Canadian cannabis space both by buying out its competitor, HEXO, and by taking full ownership of its beverage joint venture, Truss Beverage, from Molson Coors Canada.
Tilray's strategic moves to diversify beyond cannabis and shore up its Canadian cannabis market share, along with its various cost-saving initiatives, ought to enable the company to achieve positive cash flow by fiscal year 2026. However, some optimistic analysts believe this milestone could be reached as early as this fiscal year or by fiscal year 2025.
What does this all mean for investors? Tilray's entry into alcohol may not solve all its problems, but it should provide additional stability and resilience for the company during the nascent stage of legal cannabis. In other words, Tilray should have staying power through its diversified revenue stream, and that could be a key factor in determining the winners and losers in the legal cannabis space.
Tilray stock probably won't deliver market-beating returns in the near term unless the U.S. legalizes cannabis at the federal level. However, if you are a patient investor who can buy and hold shares for 10 years or longer, this pot stock could be worth the risk. The global cannabis market is expected to surpass $200 billion in annual sales by 2033, according to multiple analysts, and Tilray has the assets and capabilities to capture a significant share of the market.
A leader in next-generation air transport
Traffic is more than a nuisance. It is a serious economic problem. Archer Aviation may have a breakthrough solution. The company is working on a vehicle called an electric vertical take-off and landing (eVTOL) aircraft for use in "urban air mobility networks."
In effect, Archer is trying to create an electric aircraft that can be used as an air taxi. Wall Street analysts think this futuristic market could be worth upwards of $66 billion annually by 2033. For comparison, Archer's market cap at the time of this writing is approximately $1.77 billion.
What is the current status? Archer is preparing to start "for credit" air testing of its Midnight eVTOL aircraft with the Federal Aviation Administration next year. The company also has plans to launch air taxi services in the UAE and India in 2026.
So, there is definitely some meat on the bone when it comes to Archer's core value proposition. As a direct result, investors have already bid up the company's shares by a whopping 215% this year. Even so, Archer's shares remain down by over 40% from their initial public offering price roughly two years ago, reflecting the risk-averse nature of the broader markets over this period.
Overall, this eVTOL play is risky due to the high degree of uncertainty involved in investing in a market that doesn't exist yet. But Archer is attempting to solve a major challenge in global transportation with a novel solution. So, if you're the risk-tolerant type, this small-cap eVTOL stock may be worth adding to your portfolio for the long term.
