 |
| By Gavin Magor |
Nearly one year ago today, I told you that “small-caps have been underperforming their larger brethren of late.”
I also said, “there are three reasons why that could change in a hurry … as early as this year.”
It happened. The tide turned almost instantly.
Oh, it’s not like mega-cap stocks have had a terrible 12 months. But small-caps came to life:
The Russell 2000, which represents the small-cap market, outpaced the S&P 500 35.3% to 21.5%.
But I gave you a better way to play this turnaround — eight specific small-cap stocks to buy.
Today, I’ll:
- Show you how they did.
- Check in on the underlying reasons for their performance.
- And give you new names we’re seeing climb in the ratings.
Let’s start with the performance …
Big Wins Outweigh Small-Cap Risk
There were eight small-cap stocks that had recently been upgraded to “Buy” in our system.
They were:
Guaranty Bancshares was bought out at the end of September, less than two months after the original article.
However, if you bought it when we shared this full list, you’d have exited with a 14.4% gain in less than 60 days.
The rest are still actively traded. And their results were varied:
This is a bit messy. But it shows four of the eight underperforming the S&P and four outperforming it.
So, mixed results, right?
That’s what makes small caps extra special. The four outperforming the market did all the heavy lifting.
If you bought an equal share of all eight, you’d be sitting on an average gain of 40.9% — nearly twice the broad market and even more than the Russell during its breakout year.
There were three reasons why these stocks did so well …
As expected, the Fed cut interest rates three times between this article and the end of 2025:
As noted, that helps small-caps even more than their larger counterparts because financing is more important to early growth and expansion.
Second, the Trump administration has upheld its campaign platform of deregulation.
We’ve seen that in all kinds of areas — from financial markets to the FDA.
Regulation holds back small-caps even more than large multinational blue chips that can refocus efforts in other areas.
Finally, we expected small-caps to use the boom in AI to streamline operations and increase margins.
That’s been the case for the past year and what might have put our eight picks — which were heavily weighted to the financial sector — over the top.
So, what do we see for the next year?
Deregulation is not going to slow down until a new executive branch election.
Even a midterm landslide for the opposition party won’t be able to undo what’s been done on regulations or steer a very different course on this front.
And AI isn’t going anywhere. The Mag 7 continue to spend fortunes building it up. Small-cap companies benefit from it right away.
Interest rates, on the other hand, ARE a different story.
The new Fed Chair has talked the talk about rate hikes. But he hasn’t yet walked the walk.
Higher rates would add strain to small-cap companies as a general rule.
However, not every small cap company is the same.
Some already have strong cash flows, profitability and bolstered balance sheets.
It’s the ones that will need immediate financing you should stay away from.
So, what small caps should you consider for the next 12 months?
Let’s see what our ratings found …
Your New Top 7
There were fewer than originally. But I expanded from a market cap ceiling of $500 million to $1 billion and pushed out the timeframe for each company’s most recent upgrade to “Buy.”
These seven came back as the top small-caps right now.
As you can see, they have been on fire the past 60 days. So, consider looking for dips for any entry opportunities.
Again, we’re seeing many financial sector stocks on the list.
While these are often more tied to interest rates, they are also some of the biggest beneficiaries of AI streamlining.
Of course, you should perform your own due diligence when investing in anything, let alone small-cap stocks.
To help with that, I urge you to watch this.
It will give you access to our data, ratings and more. It will also show you how a mysterious alert leads an investor to 310% gains.
Cheers!
Gavin Magor
