As new recommendations, we are highlighting three small stocks with big upside potential, suggests Rich Moroney, editor of Upside — an advisory service that focuses on small and mid cap growth stocks.

CarGurus (CARG) operates an online marketplace that allows dealers and car owners to buy and sell new and used vehicles. Dealers typically pay subscription fees in exchange for having cars listed. The company, which has more than 24,000 paying dealers, also purchases cars directly from consumers and resells them to dealers.

With car inventories now at healthy levels following shortages during the pandemic, many dealers are turning to CarGurus to help boost sales. The company claims to have the most-visited automotive shopping site in the U.S.

Analyst estimates are rising, with the consensus projecting per-share-profit growth of 19% for full-year 2023. Revenue is expected to slump 45%, partly because management has slowed transaction volumes to focus on more profitable and sustainable growth. For 2024, the consensus calls for per-share earnings of $1.28, up 5%.

CarGurus has delivered positive profit surprises in four consecutive quarters, with an average surprise of $0.09, or 54%. The stock earns an Overall Quadrix score of 98 (out of 100), up from 48 at the start of 2023. Both sector-specific Quadrix ranks are above 90. The stock is being initiated with a Buy rating.

Semler Scientific (SMLR) designs and manufactures healthcare products for the early detection and treatment of chronic diseases, including arterial disease and heart dysfunction. Semler’s core cardiac and vascular testing product, which measures blood flow in extremities, is used by health insurers, physician groups, and hospitals.

With a market value of $261 million, Semler is an aggressive holding given its small size and concentrated sales — two customers accounted for nearly 70% of its $57 million in revenue last year. Still, a recurring sales stream and market-share gains should help sustain growth. Semler earns the maximum Overall score of 100 and outstanding ranks for Quality (99) and Financial Strength (93).

One analyst provides sales and earnings estimates for Semler. December-quarter results are projected to show a 39% per-share-profit increase to $0.57, with revenue up 5%. Earnings outstripped expectations by 39% in the September quarter and 34% in the June quarter. Per-share earnings are projected to advance 48% in 2023, followed by 27% growth next year.

Although the stock has rallied 44% over the past three months, its valuation still looks reasonable at less than 12 times estimated 2024 earnings, or 48% below the three-year median trailing P/E of 22. Semler is being initiated as a Buy.

Pent-up global demand to take trips has fueled strong growth at Travelzoo (TZOO). The company’s members-only service offers exclusive deals on flights, hotels, and curated trips. An expansive and growing presence reflects some 30 million members, 8 million mobile users, and 4 million social media followers.

More than 5,000 global travel providers use the company’s marketing services, including Alaska Airlines, Hilton Hotels, and Royal Caribbean. Over the past 12 months, Travelzoo delivered per-share earnings growth of 833% on sales growth of 25%. The stock earns an Overall score of 93.

Travelzoo has rallied 100% in 2023 but remains a good value. The stock’s trailing P/E ratio of 10 is 57% below its 10-year norm of 23. Three analysts offer sales and profit estimates. While December-quarter earnings per share are expected to be flat, full-year growth is expected to approach 52%.

For 2024, rising analyst estimates call for per-share profits to climb 23% to $1.04, up from a consensus of $0.91 two months ago. Revenue is projected to advance 11%. An aggressive stock, partly because of its tiny market capitalization of $124 million, Travelzoo is being started as a Buy.

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