There have been few bright spots in the stock market so far this year, but experienced investors will tell you this can indicate a buying opportunity. With plenty of room for upside, small-cap stocks may be worth a look.
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What Is a Small-Cap Stock?
The term “small-cap” is short for small capitalization. A company’s market capitalization is its worth in terms of what investors will pay for it. Market capitalization is the price per share times the number of shares outstanding, and small-cap companies have a market capitalization between $300 million and $2 billion.
Note that small-cap stocks are more volatile than mid- or large-cap positions, so choose carefully.
There are several indices that follow small-cap stocks, but the benchmark is the Russell 2000. Since this index always includes 2,000 companies, the valuations may sometimes fall outside the definition of small-cap. In fact, the index includes the companies ranked from number 1,001 to number 3,000 among the 4,000 largest publicly traded companies.
Like the rest of the market, the Russell 2000 has had a tough year so far. On Jan. 3 of this year, the index was trading at $2,272.56, but by Oct. 10, its value was $1,675.27. Of course, not every stock in the index fared badly, but a market like this one indicates that you want to do your homework before you invest.
What Are Some Small-Cap Stocks?
Small-cap stocks are usually young companies. After all, the goal of a small-cap company is to someday become a large-cap company. So, many small-cap stocks may be companies you’ve never heard of. But keep in mind that Apple, Google and Microsoft were once small-cap companies, too.
Here are some small-cap companies you have probably heard of:
- Green Dot Corporation (NYSE: GDOT), provider of reloadable prepaid debit cards
- American Eagle Outfitters (NYSE: AEO), clothing retailer
- Genworth Financial (NYSE: GNW), insurance company
- Big Lots (NYSE: BIG), general merchandise retailer
- Allbirds (Nasdaq: BIRD), footwear and apparel retailer
Best Small-Cap Stocks at a Glance
Here’s a quick look at some of the best small-cap stocks for October 2022.
|Stock||Price||Market Cap||P/E Ratio|
|Griffon Corp.||$30.74||$1.83 billion||12.21|
|Dycom Industries||$97.93||$2.96 billion||31.83|
|OptimizeRx Corp.||$15.04||$276.13 million||N/A|
|First Bancorp||$38.51||$1.40 billion||11.89|
What Are the Best Small-Cap Stocks To Buy Now?
Small-cap stocks can produce big returns, but they can also produce big losses. They are volatile even in relatively stable markets, so a market like the current one requires additional caution. That said, there’s money to be made, and including small-cap stocks in your portfolio is a good way to diversify.
Here are some small-cap stocks to consider.
Ebix (Nasdaq: EBIX)
Ebix provides infrastructure software exchanges and e-commerce services to the insurance, financial, travel and healthcare industries, according to its Yahoo Finance profile. Shares have declined nearly 40% year to date despite recent revenue and earnings growth, but some analysts expect a turnaround. In fact, they’re predicting an average target price of $99.50, which is around 443% higher than the stock’s most recent closing price.
Of the three analysts rating the stock in October, one calls it a buy and two call it a strong buy, according to Yahoo Finance.
Best for: Investors with a strong tolerance for risk
Griffon Corporation (NYSE: GFF)
Griffon Corporation is a conglomerate comprised of wholly owned subsidiaries in the consumer and professional building products sector. The stock traded at $30.74 on Oct. 10, but it has a one-year target estimate of $46.40. It also has a forward dividend yield of 1.17%.
Four of the five analysts who followed it in September rated it a strong buy and the fifth rated it a buy. The one analyst following the stock in October rated it a buy.
Best for: Those willing to hold the stock long-term — one year or more
Dycom Industries (NYSE: DY)
As of Oct. 10, Dycom Industries stock was trading at $97.93, with a one-year target estimate of $135.75. The company has a recommendation rating of 1.7 on a scale of 1 to 5, with 1 being a strong buy. Of the 10 analysts following the stock, five rate it a strong buy, four rate it a buy and one recommends holding.
Best for: Investors looking for price appreciation rather than dividends
OptimizeRx Corporation (Nasdaq: OPRX)
OptimizeRx Corporation supports medical prescribers and patients with a single platform for point-of-care. Trading at $15.04 as of Oct. 10, OPRX has a one-year price target estimate of $29. Four out of six analysts watching the stock in September rated it a buy, and two rated it a strong buy. The one analyst watching it in October rated it a buy.
Best for: Investors looking to hold for the long term
First Bancorp (Nasdaq: FBNC)
First Bancorp is a regional banking corporation and the parent company of First Bank. It recently announced it will acquire GrandSouth Bank, as the banking landscape continues to consolidate. The company’s one-year average price target estimate is $46.60, up from its Oct. 10 closing price of $38.51.
Seven analysts reported by Yahoo Finance follow the company, and in October, four of them rated it a buy, one rated it a strong buy and two recommended holding the stock, for a recommendation rating of 2 out of 5. The stock’s dividend yields 2.3%.
Which Companies Are Small-Cap?
A small-cap company is defined as one with a market capitalization between $300 million and $2 billion. The number of small-cap companies varies as valuations change, but the Russell 2000 index is comprised of 2,000 companies that have valuations in or around this range.
Companies move in and out of the small-cap category as they grow or shrink, so a company that is a small-cap company today may be a mid-cap or even a large-cap company in a few years.
How Do I Find New Small-Cap Stocks?
You evaluate small-cap stocks the way you would any other position. Be sure you understand the business they are in and how they match up against their competition. Look at their price-to-earnings, or P/E, ratio, compared to other companies in their industry. Review their history and consider what the analysts who follow the company have to say, and how that assessment compares to other stocks.
If you want to add small-cap exposure to your portfolio but are hesitant about the risks, consider a small-cap index fund. These funds mimic the small-cap universe, protecting you from the volatility of individual stocks. Here are some small-cap index funds to consider:
- The Vanguard Small-Cap ETF (VB.IV) tracks the performance of the CRSP US Small Cap Index.
- The Fidelity Small Cap Index Fund (Nasdaq: FSSNX) tracks the total return of U.S. small-cap companies, with at least 80% of its investments in companies in the Russell 2000 index.
- The iShares Russell 2000 Growth ETF (NYSE: IWO), as its name would suggest, tracks the Russell 2000 equity index.
Small-cap stocks can be an important part of your portfolio, providing an upside as the market hopefully begins to recover. By carefully evaluating your choices in this large and diverse universe, you’ll be in a good position to benefit from any upcoming rally.
Daria Uhlig contributed to the reporting for this article.
Data is accurate as of Oct. 10, 2022, and is subject to change. Information on analyst ratings was sourced from Yahoo Finance.