Freedom picks small caps set to gain from another Fed rate cut

The Fed will announce its interest-rate decision on Wednesday, October 29. Markets expect a 25-basis-point cut to 3.75-4.00%. The prior revision in September reignited the stock market, and analysts called small-caps – represented by the Russell 2000 index – the “clear winner.” The day after the decision, on September 18, the index hit a new all-time high for the first time in four years, jumping 2%. Over the last six months, the Russell 2000 is up 28.4%, outpacing the S&P 500, the benchmark for large caps, which is up 23.8% in the same period.

At the request of Oninvest, Freedom Broker has picked five small caps that could benefit from a Fed rate cut.

Industrial Logistics Properties Trust

Industrial Logistics Properties Trust, a REIT with a market value of $400 million, could benefit from monetary easing since it would be able to refinance a large portion of its liabilities, Freedom says. The need is acute: more than 33% of its floating-rate debt matures in 2026, analysts note.

The trust owns and leases industrial and logistics properties. Its shares have rallied almost 65% year to date to $6 apiece. Freedom sees additional upside of nearly 12%. However, analysts caution that this REIT should not be treated as a traditional “core” asset – meaning high-quality, low-risk real estate. “This is rather a tactical, counterintuitive bet on the management’s ability to execute on the deleveraging plan,” Freedom writes.

Two Wall Street analysts rate the stock “buy” and two “hold,” according to MarketWatch data. The average target price of $6.85 per share implies 14.5% upside.

Millrose Properties

This $5 billion REIT could benefit from a rebound in developer and homebuyer activity – supported by more affordable mortgages. Millrose represents a compelling opportunity in residential development because of its Homesite Option Purchase Platform (HOPP’R), a proprietary system for managing land development and takedown schedules, Freedom says. Millrose’s partnership with sector leader Lennar helps it to meet production demands while mitigating land-holding risks.

Freedom highlights that the REIT focuses on permissioned territories and short cycles, which enables rapid capital rotation and leverages the industry shift to an asset-light model, i.e., with minimal asset ownership and outsourced functions.

Freedom’s target price is $39 per share – about 20% above the October 24 close of $32.40 per share. Five Wall Street analysts cover the stock – all rate it “buy.” The average target price is $37.70 per share, implying 16.4% upside.

Sky Harbour Group

For developer Sky Harbour Group ($790.4 million market capitalization), a rate cut could be supportive given its elevated leverage. Its debt-to-capital ratio is 87.6%, Freedom notes. The company develops, leases, and manages hangar complexes for private aviation at key U.S. airports where demand materially exceeds supply. Sky Harbour has also engineered a business model that drives occupancy to 120-130% by using previously idle space.

Freedom’s target price is $11 per share, about 5.7% above the October 24 close.

Wall Street is more optimistic: the consensus target price is $17.08 per share – 64% above current levels. The stock has five “buy” ratings and one “hold."

Global Water Resources

Global Water Resources ($289.6 million market capitalization), which operates water and wastewater systems, could reduce interest expenses and improve cash flow by refinancing its expensive debt – roughly 18% of it carries a 5.5% rate. At the same time, near-term risk is limited: about 60% of its debt matures after 2035, Freedom notes.

Freedom sets a target of $10.50 per share – in line with the current price – and highlights the 3% dividend yield as the main feature of the investment case.

According to MarketWatch, three analysts cover the stock – all rate it “buy.” Their average target price of $14.17 per share implies 35% upside.

Unitil Corporation

Utility company Unitil Corporation ($898.1 million) has a large portion of its debt – about 19% – linked to a fed funds rate of 5.00-5.50%, meaning refinancing could materially reduce interest expense. Unitil supplies electricity and natural gas in established New England markets. Freedom views it as attractive given its stable, regulated model and its clear strategy of growth through bolt-on acquisitions.

Unitil also maintains a consistent dividend policy, with a yield of about 3.8%. Freedom’s target is $56 per share, for 11.6% upside versus the October 24 close of $50.20 per share.

Two Wall Street analysts rate the stock – both “buy.” The average target price of $59 per share implies 17.5% upside.

Wall Street remains cautiously optimistic on the Russell 2000 and sees further upside mainly tied to additional rate cuts. Glenmede strategists Jason Pride and Michael Reynolds argue that small caps are finally having their moment in the spotlight. After a challenging couple years for their bottom lines, earnings growth for the Russell 2000 is expected to increase over 35% in the third quarter.

Noble Capital Markets wrote that the Fed’s policy could be a "turning point” for small caps. Lower rates lighten the debt burden, free capital for expansion, and make the segment more appealing.

Still, optimism comes with risk, Brett Kenwell, U.S. investment analyst for eToro, warns. If the U.S. economy slows or the Fed undershoots expected cuts, small caps may struggle.

Daniel Skelly, head of Morgan Stanley's wealth management market research and strategy team, argues that the latest flare up in trade tensions between the U.S. and China reinforces the importance of large cap, quality companies, even though "that may sound counterintuitive given the Russell 2000 small-cap index has gained more than twice as much as S&P 500 on a percentage basis since early August." He adds: “a cooling labor market and slowing economic growth could pose a challenge for many of the lower-quality, unprofitable companies that hitched a ride on the rally off the April lows.”

In the fourth quarter, small-cap stocks are unlikely to perform as strongly as they did in the third, according to Adam Parker, founder of Trivector Research. He attributed this to what he described as the “structural inferiority” of the asset class, given that “there is more junk than quality” among small-cap names, and that these companies tend to be less profitable and more cyclical than larger peers.

This material does not constitute investment advice.

This article was AI-translated and verified by a human editor.