Buy these 40 smaller stocks with up to 106% upside despite higher interest rates: UBS
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- Large caps have consistently led small- and mid-sized companies in recent years.
- But smaller firms have fared well lately, despite expectations for higher interest rates.
- UBS shared 40 top small- and mid-cap stocks to buy now.
A forgettable multi-year stretch for smaller stocks could end in 2025, researchers at UBS say — even though key risks are looming over the cohort.
The S&P 400 and S&P 600 indexes, which track US-based mid- and small-cap stocks, have made little progress in the last few years, at least compared to the better-known S&P 500.
Since the start of 2022, mid caps have risen 12.7% and small caps are up just 2.1% while large caps have surged nearly 25%, despite having their worst year since the financial crisis in 2022. That tepid performance has come despite a slew of predictions that small caps would finally take the baton from large caps.
Smaller stocks have held up in 2025, despite headwinds
This long-awaited reversal is bound to happen eventually, especially since UBS analysts led by Joseph Parkhill pointed out in a mid-January note that smaller stocks have bested their bigger peers by 2% per year in the long term.
But it would be fair for investors to question whether this is the year the streak snaps, given that interest rates seem set to stay higher for longer following last month's blowout jobs report. The US economy doesn't appear to be anywhere near a recession, so there's little rush to cut rates.
Persistently high rates would weigh on all stock valuations, though it could be an especially tough break for smaller companies, which disproportionately hold floating-rate debt. Roughly 46% of small- and mid-cap stocks' debt is at floating rates, compared to just 10% for large caps.
Smaller firms may also be more adversely affected by tariffs and major regulatory reforms.
"Given the uncertain rate and policy backdrop, stock selection and strong fundamentals are critical," UBS analysts wrote in the note.
However, these risks may be priced into small- and mid-cap stocks, which are trading a full standard deviation under their 10-year average earnings multiple, UBS noted. Besides, these groups could benefit from lower corporate taxes and deregulation, or if rates actually do fall.
Investors may be adopting that glass-half-full thesis, as small- and mid-caps have led large caps through the first two weeks of the year, albeit modestly, after getting off to a shaky start.
40 smaller stocks to buy now
After making the case for small- and mid-cap companies, UBS researchers shared the 40 US stocks worth $10 billion or less as of mid-January that its analysts are most bullish on in 2025.
Below are these companies along with the tickers, market capitalizations, price targets from UBS, upsides to those targets, industries, and the theses (trimmed for length in some cases) for each.
Markets Insider
Ticker: WMS
Market cap: $9.5B
Price target: $155
Upside to target: 26.7%
Industry: Homebuilding & Building Products
Thesis: "Following two consecutive below-trend years, we expect WMS to return to historical average HSD% revenue growth in FY26 & FY27 driven by a combination of improving end market activity and continued thermoplastic conversion. Furthermore, we believe concerns of adjusted-EBITDA margin reversion will likely prove overblown as price/cost pressure abates through FY2H25. Combined with the recent pullback in shares, we believe these factors create an attractive entry point."
Markets Insider
Ticker: ADC
Market cap: $7.3B
Price target: $84
Upside to target: 18.8%
Industry: REITs
Thesis: "We rate ADC a Buy as we have elevated confidence in its ability to drive AFFO growth above the sector average through accelerating acquisition activity at a reasonable valuation. Further, we believe it has outsized exposure to high-quality, stable tenants that should limit downside from tenant credit issues in an unfavorable macro (ADC has 67.5% investment grade tenants vs. peer average of 42.8%). We model 2026 AFFO growth of 5.6% vs. the consensus Triple Net average of 3.8%."
Markets Insider
Ticker: AA
Market cap: $9.9B
Price target: $53
Upside to target: 38.8%
Industry: Mining
Thesis: "AA is down ~25% since mid-December due to a correction in the spot alumina price from record levels. In our view, lower alumina price is now [discounted] and AA offers leverage to attractive aluminium fundamentals that will drive positive earnings momentum, attractive FCF generation & debt reduction in 2025."
Markets Insider
Ticker: ALGM
Market cap: $4.3B
Price target: $30
Upside to target: 28.2%
Industry: Semiconductor and Semiconductor Equipment
Thesis: "Allegro is an auto-focused fabless analog semi company in the driver's seat for both a cyclical recovery in the auto semi market in 2025 and for secular growth as electrification and ADAS increase auto semiconductor content for the remainder of this decade. We expect a cyclically-driven positive estimate revision momentum cycle this year with business fundamentals improving and customers' semi inventories remaining extremely low, while expectations and investor sentiment are modestly bearish, creating an attractive risk-reward setup."
Markets Insider
Ticker: ARMK
Market cap: $1B
Price target: $46
Upside to target: 17.1%
Industry: Business Services
Thesis: "ARMK is benefitting from moderating food inflation, which along with stabilization of supply chain and labor, is enabling the company to realize steady 40-50 bps of core margin expansion annually. This translates to a healthy 15%+ operating income growth and 20%+ EPS growth profile organically for F2025E. Additionally, the company is starting to reach its leverage target of 3.5x and is beginning to explore other capital deployment opportunities beyond ongoing de-leveraging."
Markets Insider
Ticker: ASTS
Market cap: $6.2B
Price target: $31
Upside to target: 43.9%
Industry: Cable, Satellite & Telecom Services
Thesis: "We believe AST has the proprietary technology to tap into the emerging space-based cellular broadband market with a TAM/annual revenue opportunity at tens of billions of dollars. While still a high-risk, high-reward type investment, we believe the company's broad list of partners lends credibility to its technology/funding path and we see further catalysts over the next twelve months, including the results of beta tests on its first five satellites, the launch of Block 2 satellites and US regulatory approval."
Markets Insider
Ticker: AXS
Market cap: $7.4B
Price target: $105
Upside to target: 18.6%
Industry: Insurance
Thesis: "We see re-rating for AXS's shares as its business mix shifts towards higher-multiple, lower-volatility, specialty commercial insurance lines. Moreover, given its recent LPT and reserving actions it took at the end of 2023, we view AXS's loss reserves as among the most conservative in the industry. We also see stable margins aided by expense savings and the potential for improved premium growth given AXS's exposure to E&S lines."
Markets Insider
Ticker: BE
Market cap: $5.2B
Price target: $33
Upside to target: 45.7%
Industry: Refiners & Biofuels
Thesis: "There are three key reasons we believe BE is well positioned to benefit from the growth in AI-driven power demand: 1) BE already has an existing solution that can be deployed in 6-9 months vs. possible solutions that will take three to four years to develop; 2) BE cells run on a continuous basis, and the power supply is not intermittent in nature; and 3) BE's solid oxide based fuel cell is almost 30% more efficient than combined cycle gas turbines."
Markets Insider
Ticker: BRZE
Market cap: $4.5B
Price target: $51
Upside to target: 16.5%
Industry: Software
Thesis: "BRZE has underperformed the broader software universe median return of +16%, yet with faster revs growth (we model 18% in 2025), shares trade at a discount to peers trading closer to 10x-11x CY25 revs. At the company's September analyst day, guidance for dollar-based net retention of 110% caught investors by surprise and raised questions on the prospects of maintaining 20%+ growth, however if signs of growth stabilization occur in early 2025 with stable (or improving) macro, shares are set to outperform as Braze can benefit from a return to healthier growth marketing budgets."
Markets Insider
Ticker: BBIO
Market cap: $6.6B
Price target: $62
Upside to target: 77.1%
Industry: Biotechnology
Thesis: "We have high conviction in BBIO into 3 Ph3 readouts in 2025 — achondroplasia YE'25, where we think BBIO's oral can take meaningful share, and ADH1 & LGMD2i (we expect mid-late '25) which we think are both relatively under the radar and underappreciated with likely success. BBIO is also launching Attruby in ATTR-CM (approved Nov '24), which we think is a large market. So far our initial checks on Attruby scripts have trended very positively and we think the initial launch could go better than expected."
Markets Insider
Ticker: CACI
Market cap: $1B
Price target: $513
Upside to target: 14.8%
Industry: Aerospace & Defense
Thesis: "CACI has peer-leading 90% exposure to DoD/DHS/Intel spend which we believe will continue to grow driven by national security prioritization. We expect the stock to re-rate as CACI demonstrates its ability to drive peer-best and above-consensus FCF growth even in a more uncertain environment. We think there is margin upside as they continue to execute on their 'bid less, win more' strategy supported by the focus on outcome-based software solutions. We look to Trump's 2025 budget request (expected around May) as a clearing event that will assuage overdone budget concerns."
Ticker: CRC
Market cap: $4.9B
Price target: $68
Upside to target: 25.7%
Industry: Energy
Thesis: "Chefs' Warehouse can benefit from a better backdrop in food away from home, and it should see some nice margin expansion as it grows into its new capacity and takes a breather on M&A (we model ~20 bps of adj. EBITDA margin expansion YoY). CHEF also targets a higher income end demographic relative to peers, so we see less risk of trade out impacting its customer base. Even after its recent run, it still trades 20% below its 5 year average on an EBITDA basis."
Markets Insider
Ticker: CHEF
Market cap: $2.1B
Price target: $60
Upside to target: 14.1%
Industry: Hardline, Broadline & Food Retail
Thesis: "We view CRC as unique E&P, with a diversified asset base that differentiates it vs. peers, including power, real estate, and an emerging carbon capture, utilization and storage (CCUS) business. Our positive outlook is based on upside from the CCUS unit, which we value at $16/share. We expect the recent receipt of CRC's CTV I-26R Class VI Permit to set up for a domino effect of positive catalysts within the CCS business in 2025, which began this week with the approval of CRC's first injection project."
Markets Insider
Ticker: CGNX
Market cap: $6.6B
Price target: $58
Upside to target: 50.6%
Industry: Electrical Equipment & Multi-Industry
Thesis: "We see an unique opportunity to own high-quality growth at a discount. The machine vision market downturn which began in 1H22 is nearing an end: continued early cycle momentum in logistics and semiconductors, and a positive inflection in short-cycle industrial and consumer electronics, should drive an acceleration to double-digit organic sales growth. Combined with outsized operating leverage, we expect EPS to more than double over the next two years."
Markets Insider
Ticker: CCK
Market cap: $10.1B
Price target: $108
Upside to target: 27.6%
Industry: Packaging
Thesis: "We believe markets can deliver 2%+ volume growth in 2025, which would be best in class among packaging firms. A recent inflection in US volumes is positive and supportive of growth, as well as Europe volume growth continuing into 2025 (can substrate share gains). The Industrial business of CCK is depressed and has potential to drive outperformance vs peers if there is any pickup in goods shipments/industrial production."
Markets Insider
Ticker: BROS
Market cap: $9.1B
Price target: $67
Upside to target: 13.8%
Industry: Restaurants
Thesis: "We believe BROS shares are attractive and positioned for further upside given a compelling sales catalyst path that includes mobile order and throughput opportunities to drive '25 [same-store sales], as well as a food launch in '26. We expect BROS will maintain a leading store growth trajectory supported by attractive units economics and a sizable TAM, w/ confidence from strong new store performance."
Markets Insider
Ticker: DY
Market cap: $5.6B
Price target: $224
Upside to target: 17.5%
Industry: Machinery, Engineering & Construction
Thesis: "We rate DY a Buy, as we expect the accelerating investment in telecom infrastructure, specifically fiber optic networks, will drive a 12% EBITDA CAGR for from FY25 to FY27 (i.e. corresponding to cal 2026 and 2027). We also see upside to our [and] consensus growth estimates, driven by burgeoning opportunities in long-haul/intercity fiber connections which serve data centers, as well as upside to margins, where DY believes it is feasible to get adjusted-EBITDA margins back to historical peak levels."
Markets Insider
Ticker: ELF
Market cap: $7.2B
Price target: $156
Upside to target: 21.5%
Industry: Household & Personal Care
Thesis: "In an environment where the willingness to own Staples is limited, we believe ELF is one of the few names where CY25 earnings estimates do not need to move lower, particularly given (1) top-line trends in tracked channels have held in better than expected, and (2) even in a more onerous tariff scenario, we believe ELF has the necessary levers to offset profit. We see risk as skewed to the upside for F3Q earnings with top-line likely to surpass Street estimates in both US and Intl., and believe the company is positioning itself for healthy earnings growth in FY26 (we model +25% EBITDA growth) given that it appears fully invested from an advertising standpoint, and there are opportunities for meaningful leverage from nonmarketing SG&A."
Markets Insider
Ticker: ELAN
Market cap: $5.9B
Price target: $18
Upside to target: 51.9%
Industry: Healthcare IT & Distribution
Thesis: "With valuations near trough level, we see a compelling risk/reward skew (3:1) as we consider the strong potential for EBITDA recovery into the HSD in 2026 vs. the LSD in 2025. Even with modest share capture of new launches and conservative inputs, we model EBITDA accelerating to 10% in 2026. By contrast, we believe the market is pricing in a 10-year EBITDA CAGR (2025-2035) of 4% — which is below the 7% that we model."
Markets Insider
Ticker: WTRG
Market cap: $9.5B
Price target: $42
Upside to target: 21.8%
Industry: Utilities & Power
Thesis: "Declining regulatory risk and a reduction in required equity should revalue WTRG to a premium P/E valuation versus the -15% water utility discount 15x our $2.40 in '27. Final approval of its Aqua Pennsylvania water rate case settlement in February completes electric and gas rate case decisions over the last 6 months that represent 75% of rate base. This would solidify the 6% EPS growth rate and 3.7% dividend yield which is an average total return for utilities for a lower risk profile. The PA water rate decision should also provide for a lower annual equity issuance requirement versus $250 million currently."
Markets Insider
Ticker: FLNC
Market cap: $2.8B
Price target: $28
Upside to target: 78.2%
Industry: Alternative Energy & Environmental Services
Thesis: "We anticipate FLNC FY 2025 adj. EBITDA to grow +133% y/y driven by strong FY 2024 orders and rapidly growing battery market driven by increasing renewable penetration. FLNC is the number two utility-scale battery installer (after TSLA) in the U.S. and has been able to consistently expand earnings margins. [Its] strong market position enabled 545bps of EBITDA margin expansion in FY 2024 and we expect a further 179bps increase in FY 2025."
Markets Insider
Ticker: GKOS
Market cap: $8.3B
Price target: $182
Upside to target: 21.5%
Industry: Medical Supplies & Devices
Thesis: "GKOS is at the precipice of what we believe is a game-changing new product launch in glaucoma that should drive at least 28% four-year sales CAGR through 2028 per our estimates, and more likely than not will drive significant upside given its efficacy and ease of use. Our analysis suggests that iDose could drive as much as 11% and 9% sales upside in 2025 and 2026 respectively off our base-case estimates."
Markets Insider
Ticker: GLBE
Market cap: $9.3B
Price target: $68
Upside to target: 21.8%
Industry: Payments, Processors & FinTech
Thesis: "A best-in-class provider of global cross-border D2C eCommerce solutions, Global-e is in the early stages of penetrating an $800 billion+ market opportunity by volume, capable of delivering 30%+ GMV and gross profit CAGRs (UBSe) over the next three years. We believe the record customer pipeline, increased visibility to merchant launches, and continued ramp-up of managed markets bode well for strong top-line growth, while FCF margin continues to expand from the already strong ~20% level in 2024. Catalysts include 2025 official outlook with Q4 results and potential updates on long-term financial targets in the coming months."
Markets Insider
Ticker: GXO
Market cap: $5.4B
Price target: $72
Upside to target: 60.3%
Industry: Transportation
Thesis: "With over 1,000 customer sites/warehouses in the US and across Europe, GXO is one of only a few global logistics companies that has the scale and skill to offer automated warehouse solutions to companies who manage their own warehouses and who seek to drive labor efficiency and service through outsourcing. We anticipate a cyclical lift to revenue growth in 2025/2026 on top of the attractive multi-year secular revenue growth backdrop driven by outsourcing and automation. We anticipate multi-year EBITDA growth of 8%+ per annum for GXO which supports upside for the stock."
Markets Insider
Ticker: INTA
Market cap: $5.2B
Price target: $84
Upside to target: 25.4%
Industry: Business Process Management & IT Services
Thesis: "Buy INTA on undervalued differentiated offerings amid secular trends — [the] stock is poised to continue outperforming amid better-than-expected cloud ARR — growing 27% YoY, driven by a clearer line of sight on cross-sell potential and the AI monetization potential (we frame ~100-200 bps to total ARR growth). The shift away from professional services (targeting ~10% mix long term as opposed to ~15% in 2023), improving cloud gross margins (82%-86% target), and increasing scale benefits from its Microsoft partnership all provide operating leverage. Presents a multiple re-rating opportunity over the next 12 months as execution risk is taken off the table and end market conditions improve."
Markets Insider
Ticker: LEGN
Market cap: $5.8B
Price target: $65
Upside to target: 106.2%
Industry: Biotechnology
Thesis: "We see the current valuation as an appealing set-up for outperformance as: 1) we think competitive concerns are overdone, 2) Carvykti sales performance could surprise to the upside. The clinical data makes us believe that this could be a duopoly and not necessarily a winner take-all market, which is what is priced in to LEGN's valuation. Plus LEGN is shifting bulk of Carvykti use to 2-4L Multiple Myeloma, where the competitor Arcellx is six to seven years behind."
Markets Insider
Ticker: MKTX
Market cap: $8.2B
Price target: $330
Upside to target: 51.5%
Industry: Exchanges, Rating Agencies & Business Services
Thesis: "We view MKTX as a pure-play on the electronification of credit trading, which remains early-stage. Importantly, the company has operated in a challenging macro environment, which we expect to improve as interest rates move lower. Competition has increased but we think management['s] raised focus on being protocol-agnostic will drive better market share trends in 2025."
Markets Insider
Ticker: MAT
Market cap: $6B
Price target: $26
Upside to target: 45.6%
Industry: Leisure, Gaming & Lodging
Thesis: "We expect Mattel's shares to rerate higher driven by decent execution over holiday season, but more importantly, by owned IP monetization cycle into '25 to '26 given Hot Wheels movie catalyst, strong partner movie slate (Jurassic World, home entertainment window for Moana 2) and continued cost discipline. Mattel has pristine balance sheet, and growing free cash flow that should support further buybacks into '25 to '26."
Markets Insider
Ticker: MRUS
Market cap: $2.7B
Price target: $72
Upside to target: 83%
Industry: Biotechnology
Thesis: "MRUS is our top pick in 2025. We like MRUS' lead program petosemtamab and see a $2B/year peak revenue opportunity in head and neck cancer. The stock has sold off in 2H24 largely due to the unfavorable SMID biotech backdrop, and we believe now is a good entry point with multiple catalysts on the horizon in 2025."
Markets Insider
Ticker: PVH
Market cap: $5.5B
Price target: $172
Upside to target: 73.7%
Industry: Retailing/Department Stores & Specialty Softlines
Thesis: "We think PVH has the brand strength and balance sheet to drive an +11% 5-yr. EPS CAGR. CEO Stefan Larsson is only in the middle innings of executing his 'PVH+' plan, and we think major sales and margin unlocks will play out over the next few years, with major 2nd-derivative improvement happening in 2025. As this plays out over the NTM, we expect the stock's ~8x FY2 P/E [to] expand towards our ~12x target valuation as current market skepticism dissipates."
Markets Insider
Ticker: RITM
Market cap: $5.6B
Price target: $14
Upside to target: 20.9%
Industry: Mortgage Finance & BDCs
Thesis: "RITM is well-positioned to continue to generate low-double-digit returns in the current higher-for-longer rate environment given its MSR and investment portfolio; the combination of hedging and its origination business will protect book value returns should rates decline faster than expected. Over time we see upside to the ROE (and valuation multiples) as RITM is successful at pairing more 3rd-party capital (either through Sculptor, RPT, or other new funds) with its current asset-generation capabilities."
Markets Insider
Ticker: FOUR
Market cap: $9.2B
Price target: $125
Upside to target: 22.7%
Industry: Payments, Processors & FinTech
Thesis: "Shift4 is capable of delivering above-industry, share-gaining growth rates driven by a combination of base effects (small portion of industry volumes), continued conversion (expanding beyond gateway volumes into the ~550+ software integrations provided by the gateway, alongside converting the customers of recently acquired businesses, such as Revel in the US), continued traction within new verticals (sports & entertainment [venues & ticketing], airlines, non-profits/charitable donations, etc.), international expansion (Europe via Finaro and now bolstered by Vectron and its ~300 distribution partners), traction with SkyTab (modern, cloud- based POS offering), and a strong track record of M&A (additional E2E opportunity supported by recent acquisitions of Revel, Vectron, & Givex)."
Markets Insider
Ticker: SRAD
Market cap: $5.9B
Price target: $24
Upside to target: 20.3%
Industry: Leisure, Cruise Line, Powersports, Gaming & Lodging
Thesis: "The biggest investor concern on the B2B sports-betting names has historically been whether the sports rights costs would continue to escalate, although that seems to be viewed more positively recently, with the major sports contracts now fixed for several years. Given the fixed cost nature of these sports rights contracts, and the upside to the top line from gaming market expansion, new content/services and growth of in-gaming, we believe that SRAD can continue to raise their margin expectations in the year ahead towards their long-term target of 25-30%."
Markets Insider
Ticker: SGRY
Market cap: $2.6B
Price target: $38
Upside to target: 87.8%
Industry: Managed Care & Facilities
Thesis: "SGRY offers a strong organic and inorganic growth profile and is well-positioned to benefit from ongoing secular tailwinds as more procedures transition from inpatient hospitals into the ambulatory setting. Investor concern about PE ownership and short-term disruption in free-cash-flow results creates an attractive entry point for a fundamentally sound business."
Markets Insider
Ticker: TPX
Market cap: $10B
Price target: $67
Upside to target: 16.3%
Industry: Hardline, Broadline & Food Retail
Thesis: "We see several paths to outperformance and a positive catalyst path ahead. TPX's fundamentals should see a meaningful improvement as mattress unit consumption recovers from recessionary levels. Plus, it should see sizable EPS accretion ahead from either 1) successful closing of the Mattress Firm acquisition or 2) an impactful share repurchase program as an alternative to the deal."
Markets Insider
Ticker: TROX
Market cap: $1.5B
Price target: $16
Upside to target: 63.1%
Industry: Chemicals
Thesis: "TROX is well positioned into 2025 for 1) a recovery in coatings demand, and 2) to benefit from a change in approach to TiO2 protection measures. US, Europe, and Brazil all have duties in place on TiO2 from China, and there are further regions reviewing duties. We think this creates a split market between China/rest of Asia (excl. India reviewing duties) and Americas/Europe. This dynamic should allow TROX to regain market share, and likely also lift prices as demand recovers."
Markets Insider
Ticker: DSP
Market cap: $1.2B
Price target: $22
Upside to target: 17.4%
Industry: Internet
Thesis: "We see scope for continued positive estimate revisions to FY25 Street Rev ex-TAC estimates (UBSe/St 17%/13% YoY) despite US CTV growth slowing to 16% YoY growth in FY25 from 23% in FY24. ... Our bull case is supported by a mix of faster Rev ex-TAC growth and multiple upside associated with DSP's recent IRIS.TV acquisition having a more material impact to 2H25 ad budget growth as the integration of the IRIS ID improves CTV targeting."
Markets Insider
Ticker: WBS
Market cap: $10B
Price target: $76
Upside to target: 30.7%
Industry: Mid-Cap Banks
Thesis: "WBS has reduced its asset sensitivity via swaps and funding mix (InterLink) over the past 2 years, setting up for NIM expansion in 2025 despite interest rate cuts. Its peer-leading 16%+ ROTCE in '25/'26 creates a capital advantage which should enable both balance sheet growth and buybacks. The stock currently trades one standard deviation below its 100% historical relative average FY2 P/E."
Markets Insider
Ticker: WT
Market cap: $1.4B
Price target: $14
Upside to target: 47.5%
Industry: Brokers & Asset Managers
Thesis: "With [assets under management] near record highs, we expect further margin expansion (+150bps over the next two years) and double-digit operating income growth as the firm expands its distribution with larger institutions as well as its suite of customized portfolios for RIAs. From a valuation perspective, the stock trades at a significant discount to its history (13.5x NTM vs. 20-25x, historically) and roughly in line with other traditional managers despite having a more attractive organic growth profile and a comparatively stable fee trajectory."
Markets Insider
Ticker: WWW
Market cap: $1.8B
Price target: $30
Upside to target: 30.3%
Industry: Retailing/Department Stores & Specialty Softlines
Thesis: "We believe WWW's ongoing investments in its active and work brands should drive top-line inflection and out-years growth. We think stronger sales, margin recapture, and incremental FCF deployment towards debt repayment and share repurchases should drive a multi-year EPS recovery."