The Russell 2000 Index (RUT) is one of the most popular stock indices, focusing on the performance of U.S. small-cap stocks. It includes smaller, more growth-oriented companies, with market caps generally ranging from $300 million to $2 billion.
These companies are often in the early stages of development, making them somewhat more volatile than better established, larger-cap stocks. However, for most of these small-caps, with greater risk comes higher upside potential if they succeed in their industries. Here are two small-cap stocks that Wall Street believes have significant potential.
#1. Allogene Therapeutics
Allogene Therapeutics (ALLO) is a clinical-stage biotech company that develops allogeneic CAR-T (chimeric antigen receptor T-cell) therapies for cancer and autoimmune diseases. Unlike traditional CAR-T therapies, which use a patient's T cells, Allogene is developing "off-the-shelf" allogeneic therapies derived from healthy donor cells, which may provide faster, more scalable, and cost-effective treatment options.
Allogene stock has dipped 21.7% YTD, compared to the S&P 500 Index’s ($SPX) gain of 15.6% this year.
The majority of the company's candidates are still in early to mid-stage clinical trials. The treatment program for large B-cell lymphoma, cemacabtagene ansegedleucel (cema-cel), is currently in Phase 2 trials. Furthermore, ALLO-316 for the treatment of renal cell carcinoma is in Phase 1 trials. The company is also testing several other candidates in early clinical trials.
As with any biotech company, the success or failure of these trials will significantly impact the company's long-term success.
Since Allogene is still in the clinical stage, it does not generate significant revenue. As a result, it reported a net loss of $66.4 million during Q2, due to higher R&D costs to advance its pipeline. The company's cash and cash equivalents totaled approximately $444.6 million at the end of the quarter. Management believes that this cash reserve will allow for continued operations and clinical development until the second half of 2026. Nonetheless, until Allogene is profitable, it will have to rely on external financing, such as equity raises or partnerships, to fund its long-term expansion strategy.
Overall, analysts have assigned ALLO stock a “moderate buy” rating. The stock’s mean target price is $10.30, which implies expected upside of 312% above current levels. However, the Street-high estimate of $15 represents about 500% upside over the next 12 months. Out of the 18 analysts covering the stock, 12 rate it a "strong buy," one says it's a “moderate buy,” and five maintain a “hold.”
With a market capitalization of approximately $539.2 million, Allogene is a small-cap biotech stock with significant upside potential if its innovative therapies prove successful in clinical trials and eventually receive regulatory approval.
#2. Innovative Industrial Properties
With a market cap of $3.5 billion, Innovative Industrial Properties (IIPR) is a real estate investment trust (REIT) that provides real estate solutions to medical cannabis companies.
IIPR stock has gained 20.4 % YTD, outperforming the broader market's gain.
The domestic cannabis industry is rapidly expanding, as more states are legalizing the drug - whether for medical use, recreational, or both. However, it remains federally illegal, making it difficult for cannabis companies to establish large production facilities.
IIPR purchases these specialized properties and then leases them to cannabis operators, earning rental income in the process. The leases are long-term triple-net lease agreements with an average remaining term of 14.4 years, which guarantees the company recurring revenue. Investing in Innovative also allows investors to get exposure to the cannabis industry without being overly exposed to the higher regulatory risk.
At present, IIPR owns 108 properties across 19 U.S. states. The company's tenants include top multi-state operators (MSOs) such as Green Thumb Industries (GTBIF), Cresco Labs (CRLBF), Trulieve Cannabis (TCNNF), and others. These MSOs contribute 91% of its annualized base rent.
IIPR generated $79.8 million in revenue in the second quarter, representing a 4% increase. As a REIT, the company's earnings are gauged by its AFFO (adjusted funds from operations). In Q2, AFFO rose 1% to $2.29 per share.
As a REIT, Innovative is required to pay out 90% of its taxable income in dividends. It has a forward yield of 6.2%, while the real estate average yield is 4.4%. The company has increased its dividend for the past six years. IIPR raised its dividend by 4.4% to $1.90 per share in the second quarter, paying out 83% of its AFFO.
For the full year, analysts expect the company’s FFO to dip by 1.9%. However, it could increase by 6.4% in 2025.
Overall, analysts have assigned IIPR stock a “moderate buy” rating. IIPR has already surpassed its mean target price of $111.25. However, the Street-high estimate of $140 represents about a 15.3% upside over the next 12 months.
Out of the six analysts covering the stock, two rate it a "strong buy," with four rating it a “hold.”
