Investors are now focusing on small-cap stocks for their growth potential. These stocks might have been missed by many. Experts say small-cap stocks are on the rise, outperforming large-cap stocks recently.
Small-cap stocks have seen a mini-rally, with gains twice as much as large-cap stocks in the last month. This is as of July 16, 2024.
Large-cap stocks have been leading for the past one to ten years. But, small-cap stocks are now seen as undervalued. Experts suggest favoring small-cap stocks over large-cap ones.
This article will highlight the top 10 small-cap stocks in the US. They range from lithium producers to well-known brands. These stocks could bring significant growth and value over time. This list is great for both new and experienced investors looking into small-cap investing.
What Are Small-Cap Stocks?
Small-cap stocks are companies worth between $300 million and $2 billion. They are often new and innovative, with big growth potential. But, they are less stable and may not make money right away.
Definition and Market Capitalization Ranges
Small-cap stocks are defined by their market value. Companies with a value between $300 million and $2 billion are small-cap. They are different from large-cap stocks, worth over $10 billion, and mid-cap stocks, worth $2 billion to $10 billion.
Growth Potential and Volatility
- Small-cap stocks have a lot of growth potential. They often bring new products or services that change their industries.
- But, this growth comes with more ups and downs. Small-cap stocks can see big price changes because they’re more affected by market trends and investor feelings.
- Over time, small-cap stocks have done better than large-cap stocks. But, they are riskier and might not be right for every investor.
Small-cap stocks can be a powerful addition to a diversified portfolio, but they require a long-term investment horizon and a tolerance for increased volatility.
Historical Performance of Small-Cap Stocks
Small-cap stocks have shown strong performance over the long term compared to large-cap stocks. Since the year 2000, the Russell 2000 index has beaten the S&P 500. The Russell 2000 tracks small-cap stocks.
The Russell 2000 has given an average return of 9.7% from 2000 to 2022. The S&P 500 returned 7.6% over the same time. So, small-cap stocks have done better than large-cap stocks by a lot over the last 20 years.
But, this success comes with more ups and downs. Small-cap stocks can swing more in the market. Yet, the longer you invest, the more likely small-cap stocks will do better than large-cap ones.
Small-cap stocks have a history of outperforming large-cap stocks over the long run, though they can be more volatile in the short term.”
This trend shows the ups and downs of small-cap investing. The ups and downs might worry some investors. But, those looking at the long term might see small-cap stocks as a good choice for a varied portfolio.
When picking where to invest, think about how small-cap stocks have done over time. Knowing this can help you make better choices and maybe tap into small-cap investing’s potential.
Are Small-Cap Stocks Good Investments Today?
Small-cap stocks have not done well lately compared to big companies. But, things might be changing. Experts think small-cap stocks could grow more in the current market. Morningstar’s Dave Sekera says small-cap stocks are cheaper than they should be, while big companies are too expensive.
Experts at Morningstar recommend putting less money into big companies and more into small and mid-cap stocks. This could be a good chance for investors to make money from companies that are not well-known yet.
Undervaluation and Overweighting Potential
There are many small-cap companies that are priced too low and could do well. Investors should look closely at these companies to find the best ones. By putting more money into small-cap stocks, investors could see big gains from these companies.
| Metric | Small-Cap Stocks | Large-Cap Stocks |
|---|---|---|
| Valuation | Undervalued | Overvalued |
| Growth Potential | Higher | Lower |
| Volatility | Higher | Lower |
Investing in small-cap stocks could be a good move for those willing to take more risk for a chance at big rewards. By picking the right small-cap stocks, you can make your portfolio grow.
Qualities of the Top 10 Small-Cap Stocks
Top small-cap stocks stand out with certain key traits. Morningstar’s list highlights companies with strong features. They have a wide or narrow Morningstar Economic Moat Rating, showing they have a competitive edge. Their management teams also score well in capital allocation, meaning they manage money wisely.
Economic Moat and Capital Allocation Ratings
The economic moat and capital allocation ratings are key for small-cap stocks. A wide or narrow economic moat means the company has strong advantages, like lower costs or unique assets. This helps protect its market share and profits. A high rating in capital allocation shows the leadership makes smart financial decisions.
Undervalued Stocks Below Fair Value
These top small-cap stocks are also priced lower than their true value, as seen by Morningstar. This undervaluation is a chance for investors. By investing now, you could see the stock price go up as the market catches on to their worth.
The small companies on Morningstar’s list of the top 10 small-cap stocks to buy share several key qualities.
Top 10 Smallcap Stocks To Buy In The US
Small-cap stocks can be a great choice for smart investors. Morningstar, a top investment research firm, has picked 10 small-cap stocks that are really underpriced right now.
These stocks cover various industries like lithium production, car seats, and crop chemicals. They are special because they have strong economic strengths, smart money use, and could see big gains as more people see their true value.
- Lithium Americas (Argentina)
- Arcadium Lithium
- VF
- Hanesbrands
- Adient
- Compass Minerals
- O-I Glass
- Lyft
- FMC
- Polaris
These top 10 US small-cap stocks to buy are a mix of best small-cap stocks and most undervalued small-cap stocks. They give investors a chance to pick from a variety of high-potential, overlooked companies.
These small-cap stocks have the potential to deliver outsized returns for investors willing to take a long-term view and capitalize on their current undervaluation.
Lithium Americas (Argentina)
Lithium Americas is a top pick for small-cap stocks, according to Morningstar. It’s a pure-play lithium producer. This came after the company split its operations in Argentina and North America.
Pure-Play Lithium Producer
Lithium Americas focuses only on lithium production. This is key for the electric vehicle and energy storage markets. Being a pure-play, it’s set to benefit from the rising demand for lithium.
Demand Growth and Catalysts
Morningstar forecasts lithium demand to jump by almost 20% yearly. It will go from over 900,000 metric tons in 2023 to over 2.5 million metric tons by 2030. This growth is a big chance for companies like Lithium Americas as we move to sustainable energy.
| Year | Lithium Demand (Metric Tons) |
|---|---|
| 2023 | 900,000+ |
| 2030 | 2,500,000+ |
Lithium Americas is a strong choice for investors looking at the lithium market’s growth. Its focus on lithium and the expected demand increase make it an attractive investment.
Arcadium Lithium
Arcadium Lithium is a top small-cap stock to buy, formed from the Allkem-Livent merger in January 2024. It’s a pure-play lithium company. As one of the top-five lithium producers worldwide, it’s set to benefit from the growing demand for this key mineral.
Morningstar analyst Seth Goldstein sees a chance for investors to buy high-quality lithium producers like Arcadium Lithium cheaply. The market thinks lithium prices will stay low for a long time. This makes it a great time for investors to buy shares of Arcadium Lithium with a lot of potential for growth.
| Key Metrics | Arcadium Lithium |
|---|---|
| Global Lithium Producer Ranking | Top 5 |
| Margin of Safety Opportunity | Significant |
| Morningstar’s Rating | Buy |
The lithium industry is seeing strong demand growth. This is due to the global move to electric vehicles and renewable energy storage. Arcadium Lithium, being a top-five producer with a strong margin of safety, is a great investment chance for those looking at the lithium market.
VF
VF is a top apparel company and the cheapest stock on Morningstar’s list for long-term investment. It owns brands like Vans, The North Face, and Timberland. This makes it a leader in the clothing industry.
VF is working on a big plan to make things better. It wants to cut costs, pay off debt, and increase profits. This plan includes making things more efficient and focusing on Vans, its main brand. Morningstar’s David Swartz thinks this plan will help VF grow faster than others, making it stronger in the market.
Unlocking Value Through Brand Portfolio
VF has a wide range of popular brands. This makes it well-placed to meet changing consumer tastes and trends. Having many brands helps reduce risks and find new ways to grow.
As VF improves its strategy and brands, investors could see big gains over time. The company is focusing on cutting costs, paying off debt, and making its brands more appealing. This could make VF a more competitive player in the clothing market.
Hanesbrands
Hanesbrands, a well-known apparel maker, has made big news by selling its Champion brand to Authentic Brands. This move is set to greatly affect the company’s profits over time. The innerwear part of Hanesbrands usually makes more money than Champion.
Morningstar says selling Champion lets Hanesbrands focus more on its core innerwear brands. These include famous names like Hanes and Fruit of the Loom. This change is expected to make the company more profitable and efficient, helping its finances.
The Champion brand is valuable but has sometimes taken Hanesbrands’ focus away from its main business. By selling it, the company can focus more on its profitable innerwear lines. These lines are set to do well in the current market.
The Innerwear Advantage
Innerwear, like t-shirts, underwear, and socks, usually has higher profit margins than outerwear. This is because it costs less to market, produces more efficiently, and has more loyal customers. By focusing on innerwear, Hanesbrands can use these benefits to grow and increase profits.
Selling the Champion brand is a big step in Hanesbrands’ plan to make its business better. It aims to be more successful in the competitive apparel market. Investors will be watching how this move affects the company’s financial results in the next few quarters.
“The sale of Champion will have a positive effect on long-term profit margins as innerwear is generally more profitable than Champion, and the sale should allow management to focus on the innerwear brands.”
– Morningstar Analyst
Adient
Adient is a top name in the automotive seating market, drawing the interest of investors looking for good deals in small-cap stocks. It stands out with a strong market lead and only one big competitor globally. This makes Adient a clear leader in the industry.
Even with strong earnings in the last quarter, Adient’s stock price dropped due to a guidance cut. This has led Morningstar’s David Whiston to think Adient’s stock is way underpriced. It’s 63% lower than Morningstar’s fair value of $68.00 per share.
Automotive Seating Market Leader
Adient leads the automotive seating market thanks to its strong competitive edge and deep industry knowledge. It’s known for quality, innovation, and making customers happy. This has made it a reliable partner for car makers around the world.
Undervaluation and Guidance Cut
Adient’s guidance cut has worried some investors, but Morningstar sees the stock as greatly underpriced. This could be a chance for long-term investors to pick up a small-cap stock that’s selling for less than it’s worth.
| Metric | Adient | Industry Average |
|---|---|---|
| Market Capitalization | $3.6 billion | $5.2 billion |
| Price-to-Earnings Ratio | 8.2x | 12.5x |
| Price-to-Book Ratio | 0.7x | 1.2x |
“Adient’s stock is extremely undervalued, trading 63% below Morningstar’s fair value estimate. This presents a potential opportunity for long-term investors seeking an undervalued small-cap stock in the automotive seating market.”
As the top player in the automotive seating market, Adient is a great investment chance for those looking for small-cap stocks that are priced low but have big growth potential.
Compass Minerals
Compass Minerals is a small but strong company in the market. It shines with its cost-advantaged assets and focus on reducing debt. This company makes salt and specialty potash fertilizer. Industry experts see it as a top player.
According to Morningstar’s Goldstein, Compass Minerals is undervalued. Its stock is about 50% lower than its true value, estimated at $25.00 per share. This makes it a great chance for investors looking for a strong company in the salt and fertilizer markets.
Cost-Advantaged Assets
Compass Minerals has a strong portfolio thanks to its cost-advantaged assets. Its smart locations, efficient production, and access to valuable resources keep it ahead. This lets it handle challenges and find new growth better than others.
Debt Reduction and Free Cash Flow
Compass Minerals is focusing on paying off debt. It stopped paying dividends to use all its free cash for debt repayment for a few years. This move, says Goldstein, shows a focus on cutting costs and making more free cash. This could make the company even stronger and more valuable over time.
“Compass Minerals’ portfolio of cost-advantaged assets is ‘enviable,’ according to Morningstar’s Goldstein.”
As Compass Minerals moves through the changing salt and fertilizer markets, it’s focusing on its strong assets and managing debt well. This strategy could lead to more success for the company. Investors looking at small-cap companies in these markets might want to consider Compass Minerals.
O-I Glass
O-I Glass is a top glass container maker facing big challenges. Its stock is lower than its true value because of inventory issues. But, the move to eco-friendly packaging could bring new opportunities.
Inventory Destocking Headwinds
O-I Glass is dealing with inventory problems. This has hurt its finances by slowing down production and cutting profits. The company needs to improve its operations to stay ahead.
Eco-Friendly Packaging Shift
Even with inventory issues, O-I Glass is set to gain from the push for sustainable packaging. As people want more eco-friendly options, O-I Glass can use its glass-making skills to its advantage. By changing its products and processes, it can thrive in this new trend.
Investors need to look closely at O-I Glass’s situation. They should watch how it handles inventory issues and meets the demand for green packaging. This will help them understand the company’s future potential.
“The shift toward eco-friendly packaging is a significant long-term catalyst for O-I Glass, and the company’s innovative approach to sustainable solutions could drive future growth.”
Lyft
Lyft is a top pick for small-cap stocks by Morningstar. It faces a big challenge in the US ride-hailing market. Despite this, Morningstar’s analyst Malik Ahmed Khan thinks Lyft can keep its spot as the second-biggest player.
Ride-Hailing Duopoly: The Competitive Landscape
The US ride-hailing market is a two-horse race between Uber and Lyft. Lyft aims to stay the go-to choice for consumers, not to beat Uber in market share.
Lyft’s Profitability and Revenue Growth Projections
Morningstar believes Lyft will start making more cash in 2024. This is a big step forward for the company. They also expect Lyft’s revenue to grow by 11% each year for the next five years. This shows Lyft’s strong growth and profit potential.
| Metric | Projection |
|---|---|
| Free Cash Flow Positive | 2024 |
| Average Annual Net Revenue Growth | 11% |
Lyft is set to do well in the competitive US ride-hailing market. Its focus on making more money and growing revenue looks promising for its future and investors.
FMC
FMC is a top crop chemical producer globally. It’s set to benefit from the increasing need for high-quality farm products. As one of the biggest companies in crop protection, FMC is known for its innovation and quality.
Morningstar analyst David Goldstein sees a bright future for FMC. He believes the end of inventory destocking will boost the company’s shares. Goldstein thinks FMC will see better results in the second quarter and profit growth in the second half.
Premium Product Pipeline and Growth Catalysts
FMC has a strong lineup of new premium products. This is a big reason for its growth. As old products lose patent protection, FMC can bring in new, valuable ones. This keeps it ahead in the market and ensures strong financial results.
| Metric | FMC | Industry Average |
|---|---|---|
| Revenue Growth (5-year CAGR) | 7.2% | 4.8% |
| Gross Margin | 45.1% | 38.7% |
| R&D Spend as % of Revenue | 5.1% | 3.9% |
FMC stands out with its higher revenue growth, gross margin, and R&D spending. This shows its dedication to innovation. It also highlights its ability to offer premium products at higher prices and margins.
“FMC’s pipeline of new premium products should also allow it to continue producing new crop chemicals as older products roll off patent.”
FMC focuses on creating innovative and valuable crop chemicals. This strategy positions it to meet the growing demand for premium farm products. It aims for sustainable growth in the future.
Polaris
Polaris is a top name in ATVs, snowmobiles, and side-by-side vehicles. It’s a small-cap stock that stands out. The company is known for adapting to market changes and creating innovative products. These products meet the needs of many customers.
Polaris is popular because of its strong brand and loyal customers. Its products are known for being tough, fast, and versatile. This has helped it stay on top in its market. The company’s focus on making new products and strategic planning has led to steady growth and financial success.
Diversified Product Portfolio and Market Expansion
Polaris offers ATVs, snowmobiles, and side-by-side vehicles. This variety gives it a big edge in the small-cap market. It helps reduce risk and lets Polaris take advantage of different outdoor trends. This attracts more customers.
Polaris is also growing in Europe and Asia. These moves offer more chances for growth. As outdoor activities and adventure tourism grow, Polaris is ready to use its brand and expertise to get a bigger piece of the market.
Operational Efficiency and Financial Strength
Polaris is also known for its efficient operations and smart money management. It keeps costs low and streamlines its supply chain. This helps it keep healthy profits and strong cash flow.
Its strong finances, shown by a solid balance sheet and varied income, make it a great small-cap stock. Polaris focuses on smart use of money and looking out for shareholders. It does this through share buybacks and dividend payments.
In summary, Polaris has a strong brand, a wide range of products, plans for international growth, and smart money management. These factors make it a strong choice in the small-cap market.
Risks and Considerations for Small-Cap Investing
Small-cap stocks can grow a lot, but they also have risks. These risks come from their volatility and the uncertainty about their future. Investors need to know these risks before they invest.
Higher Uncertainty and Volatility
Small-cap companies are less stable than big ones. They have less predictable cash flows and face more business risks. Many top small-cap stocks have a “High” or “Very High” level of uncertainty, according to Morningstar Uncertainty Ratings.
Because of this volatility, small-caps can be very sensitive to market changes and economic downturns. Investors need a long-term view and must be ready for price changes.
Long-Term Investment Horizon
To manage the risks of small-cap investing, a long-term approach is key. These stocks need patience and careful watching. Investors should be ready to hold onto small-cap stocks for years, waiting for their value to be recognized.
Knowing about the volatility of small-caps and the need for a long-term investment horizon helps investors deal with the challenges and chances of small-cap investing.
“Investing in small-cap stocks is not for the faint of heart, but those who can stomach the volatility may be rewarded with significant long-term gains.”
Conclusion
Small-cap stocks in the US have a lot of potential for smart investors. These companies are often overlooked but offer great growth chances. They let you take advantage of market gaps. Knowing how small-cap stocks work, like their higher ups and downs and need for long-term thinking, helps you invest better.
This article talked about 10 small-cap stocks across various industries. You’ll find everything from lithium producers to car part suppliers. Each company has its own reason to invest in, like being a leader, being underpriced, or having a comeback story. By looking at their strengths, how they use money, and their value, you can find the best investments for you.
Investing in small-cap stocks needs careful and patient work. They can bring big gains but also come with more risks. By spreading out your investments, keeping an eye on them, and following market and company news, you can make the most of these growth chances.