Small-cap growth stocks have markedly underperformed the S&P 500 over the past three years. This trend is largely due to rising interest rates and investors' preference for a handful of large-cap companies specializing in artificial intelligence and weight loss drugs.
However, with the Federal Reserve expected to lower rates later this year, small-cap growth stocks could be on the cusp of a significant trend reversal. Which small caps should you keep an eye on in light of this potential catalyst?
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Prime Medicine (PRME 2.91%) and Tilray Brands (TLRY 1.71%) are two small-cap growth stocks that have struggled in the current high-interest-rate environment but now appear significantly undervalued from a long-term perspective. Here's a quick rundown of why these two high-risk, high-reward growth stocks might be worth buying right now.
Prime Medicine: A genomic medicine play
Genomic medicine is revolutionizing our approach to a multitude of complex diseases. Prime Medicine, a preclinical biotech, is spearheading the effort to bring a powerful new technique to this field called "prime editing."
Why is Prime Medicine stock worth considering? The company is gearing up to launch its first human trial later this year. The candidate, PM359, is a prime-edited cell therapy indicated for a rare, inherited condition known as chronic granulomatous disease (CGD).
What's the investing angle? If PM359's early data are positive, it will go a long way toward validating this next-generation approach to gene editing. That's a big deal because Prime Medicine has designs on developing several additional therapies that could one day be blockbuster products.
What's the risk? While prime editing is an intriguing concept, this technology is still in its infancy, which poses a bevy of unique risks for early shareholders. Thus, this speculative growth stock is probably best suited for aggressive investors looking for asymmetric risk-to-reward opportunities and who are prepared to hold for the long term.
Tilray Brands: A cannabis pioneer
Anticipated to eclipse the $440 billion mark by 2030, the global cannabis industry is charting one of the most dynamic growth trajectories worldwide. Yet, this surge has not translated into smooth sailing for investors, as numerous cannabis stocks have seen a significant decline in value post-IPO.
The overarching issue? A global delay in regulatory reforms. However, a beacon of change is emerging: Germany, which boasts the most lucrative medical marijuana market in Europe, is nearing the legalization of cannabis for adult use in a controlled setting next month, hinting at a significant shift in the regulatory landscape worldwide.
Tilray Brands, a powerhouse in the realms of Canadian cannabis and craft alcohol, stands to gain considerably from this anticipated regulatory shift. Boasting a well-established distribution network throughout Germany and an EU-GMP certified facility in Portugal, Tilray is primed to amplify its operations as soon as legal conditions permit.
The obstacle, however, is that Germany has yet to authorize comprehensive commercial operations, and it may be some time before this crucial milestone is achieved. Nevertheless, Germany's incremental move toward full legalization is reflective of the global cannabis industry's progression, a trend that bodes well for market leaders like Tilray.
As we look to the future, it may take up to a decade for the international markets to fully embrace the sale of cannabis for medicinal and recreational purposes. But the direction is unmistakable and seemingly inexorable. With countries progressively moving toward broad legalization, trailblazers like Tilray are poised for substantial gains in the years ahead.
With its stock trading at a modest 2.08 times expected sales, Tilray arguably represents an outstanding investment opportunity for those willing to take the long view, particularly in light of the worldwide movement toward more lenient cannabis policies.
