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Don't miss out on the next wave of investment opportunities. As interest rates shift, small-cap stocks are emerging as a powerful force in the market. This newsletter provides exclusive insights into three companies poised for exceptional growth in 2025. We'll break down their unique strengths, market trends, and why they're positioned to deliver impressive returns.

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As we approach 2025, there is growing optimism that small-cap stocks could make a strong comeback, particularly in light of declining interest rates. Over the past couple of years, small-cap companies—often those that rely heavily on debt financing—have struggled in the face of rising interest rates. However, with rates expected to decline, many analysts are returning to these smaller companies, which often carry more speculative but potentially lucrative investment opportunities.

This article will explore three small-cap stocks poised for growth in 2025: Star Bulk Carriers, Evolve Technologies, and Central Garden and Pet. Each presents a unique growth opportunity driven by market trends and company-specific strengths.

The potential for small-cap stocks to outperform in 2025 stems primarily from the anticipated decrease in interest rates. In recent years, high interest rates have made it difficult for many small-cap companies to manage their debt loads effectively, as they typically rely on borrowing to fund their operations. Since many of these companies are not profitable, higher borrowing costs eat into earnings and can significantly impact stock prices.

However, borrowing costs are expected to decline as interest rates fall, making it easier for small-cap companies to service their debt. This reduced financial burden could increase earnings potential and higher stock valuations. While opinions differ, small-cap stocks could offer significant opportunities for investors with a higher risk tolerance.

With that in mind, three small-cap stocks are well-positioned to benefit from this shifting economic environment.

Star Bulk Carriers is a dry bulk shipping company that has been gaining attention due to its large fleet size and strategic focus on the Chinese market. The company owns approximately 160 vessels, making it the largest U.S.-listed carrier in fleet size. Its operations are closely tied to the global shipping industry, which has faced disruptions in recent years due to port strikes and supply chain issues.

One of Star Bulk's key growth drivers is its exposure to the Chinese market. Despite economic concerns, China remains a critical player in the global steel and iron ore markets, and demand for these materials is expected to grow. In its most recent earnings report, Star Bulk noted a 7.6% increase in shipments to China through July 2024, a figure recorded before China introduced significant stimulus measures to boost its economy.

As China’s economy rebounds, the demand for iron ore and other bulk commodities will rise, further benefiting Star Bulk’s business. Valuation-wise, Star Bulk is trading at 6.9 times forward earnings, with analysts forecasting a 28% upside. In addition to the attractive valuation, the company offers a substantial dividend yield of 12.2%, making it a compelling option for income-seeking investors.

However, one potential risk for Star Bulk is the impact of rising energy prices, particularly oil. Shipping companies are susceptible to fluctuations in fuel costs, and as Chinese demand for oil increases, there may be upward pressure on energy prices. Despite this concern, the overall outlook for Star Bulk remains positive, driven by increased demand for global shipping and continued recovery in the Chinese market.

Evolv Technologies is an innovative company specializing in touchless security systems, positioning itself at the intersection of small-cap stocks and artificial intelligence (AI). Its systems represent the next generation of metal detectors, allowing individuals to pass through security checkpoints quickly without needing manual bag checks or other intrusive measures. The technology, powered by AI, has proven highly effective at detecting weapons, such as guns and knives, and has been adopted by numerous high-profile organizations, including professional sports teams, schools, hospitals, and places of worship.

Despite the unfortunate backdrop of rising concerns over public safety, Evolv Technologies has experienced strong stock performance, with shares rising nearly 60% over the past 90 days. The company's recent profitability—turning a profit for the first time in its most recent quarter—has bolstered investor confidence, and analysts expect this trend to continue.

One key metric to watch with Evolv Technologies is its annual recurring revenue (ARR), which continues to grow, signaling strong customer retention. However, competition in the security technology space is a potential risk. Other companies are working to develop similar solutions, but Evolv's first-mover advantage and growing customer base provide it with a solid competitive position.

Despite the stock’s recent runup, analysts still see considerable upside potential. Current projections suggest a 51% upside, with a price target of $5.75 per share. While Evolv Technologies remains a speculative play, its convergence of small-cap and AI trends makes it an intriguing investment option for those with a higher risk tolerance.

Central Garden and Pet may fly under the radar, but its two primary business verticals—garden and pet supplies—are tapping into strong consumer demand. Unlike many other pet companies, Central focuses on peripheral pet products, such as toys and treats, rather than pet food. Its garden business is also performing well, supported by consistent consumer interest in home and garden care.

One of Central Garden and Pet's key differentiators is its focus on maintaining a strong balance sheet. The company has a solid e-commerce business and appears to understand its niche markets, operating efficiently within them. Pet owners, in particular, have demonstrated a willingness to pay a premium for products that contribute to their pets' health and happiness, and this trend is unlikely to wane anytime soon.

Although Central Garden and Pet’s stock has only risen 7.5% in 2024, analysts see significant growth potential in the coming year, driven by falling interest rates and increased consumer discretionary spending. The price target for the stock is $43, representing a 40-45% upside from its current level.

Central Garden and Pet could provide a compelling growth opportunity for investors looking to gain exposure to the retail and consumer discretionary sectors.

As interest rates are expected to decline in 2025, small-cap stocks could see a resurgence after a challenging few years. While speculative, companies like Star Bulk Carriers, Evolve Technologies, and Central Garden and Pet present unique opportunities for investors willing to take on more risk. These companies are positioned to capitalize on macroeconomic trends and shifting consumer behaviors, making them stocks to watch in the coming year.

Investors should continue to monitor interest rate movements and broader market conditions, as these factors will likely play a crucial role in determining the success of small-cap stocks in 2025.

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Disclaimer: This newsletter is for informational purposes only and should not be considered financial advice. Please consult with a financial advisor before making any investment decisions.