Royce names two small-cap stocks with potential to rebound

Francis Gannon, co-CIO of the Royce Small-Cap Fund, has highlighted two stocks that he believes deserve investors' attention. While they declined in 2024, he sees strong long-term potential.

Market concerns about Enovis’ acquisition of 3D orthopedic implant maker Lima, which were reflected in a drop in its stock price, turned out to be unfounded, Gannon explains. Last year, Enovis shares fell nearly 21% due to doubts about whether the two companies could successfully merge, he notes. However, the management team has delivered on its promises, particularly in accelerating sales.

On February 26, Enovis reported that net sales in 2024 increased 23% to $2.1 billion, which beat the company's guidance for the first year after acquiring Lima. For comparison, sales grew only 9% in 2023. However, the day after the earnings report was released, Enovis shares retreated nearly 5% to $38.10 per share.

Most Wall Street analysts covering the company remain upbeat. According to MarketWatch, Enovis has 10 “buy” ratings versus only one “hold.” The average target price of $65 per share suggests upside of over 68% relative to the last closing price.

The cost-cutting and conservative inventory management strategy implemented by OneWater Marine's management in 2024 to restore sales is starting to pay off, Gannon notes. He noted that the Royce Small-Cap Fund increased its holdings of the stock, taking advantage of a decline in the share  price.

Last year was challenging for OneWater, with revenue declining for four consecutive quarters. For the 2024 fiscal year, which ended September 30, revenue was down 8% at $1.78 billion. Both macroeconomic factors and hurricanes Helen and Milton, which hit the U.S. Gulf Coast last year, played a role, Gannon explains. Many of OneWater’s stores are located in the region and had to be temporarily closed. This also forced the company’s management to nearly halve its earnings-per-share forecast for fiscal 2025, triggering a selloff of the stock. Since November 14, when the earnings report and revised guidance were released, shares have dropped nearly 22%.

In the first quarter of the 2025 fiscal year, OneWater's revenue grew 3% year over year to $376 million.

According to MarketWatch, seven Wall Street analysts cover the company. Their recommendations are almost evenly split: four “buys” versus three “holds.” The average target price of $22.20 per share implies upside of around 33%.