What are small-cap stocks?
Small-cap is short for small market capitalization, which is adequate to a company ‘s share price times the number of shares outstanding. A caller is classified as having a small market capitalization when its market cap falls between roughly $ 300 million and $ 2 billion. Stocks classified by market capitalization are by and large divided as follows :
|
Category |
Market Capitalization |
|---|---|
|
Micro-cap companies |
Less than $300 million |
|
Small-cap companies |
$300 million to $2 billion |
|
Mid-cap companies |
$2 billion to $10 billion |
|
Large-cap companies |
$10 billion to $200 billion |
|
Mega-cap companies |
More than $200 billion |
small-capitalization companies are often unseasoned companies. They tend to have meaning growth electric potential, but they besides are broadly less static than their larger, more establish peers. Often they are unprofitable. however, a comparison since 2000 of the Russell 2000 ( RUSSELLINDICES : ^RUT ), a small-cap-focused exponent, and the large-cap-focused S&P 500 ( SNPINDEX : ^GSPC ) shows that small-capitalization stocks have outperformed large-capitalization companies. The chart below demonstrates the remainder :
source : Ycharts
Over time, small-capitalization stock prices tend to be more volatile than those of larger companies, and livestock values fluctuate more dramatically. But, in general, the longer the evaluation menstruation, the greater the likelihood that small-capitalization stocks outperform the large-caps. As the chart shows, in recent months small-capitalization stocks have fallen precipitously amid a broader pullback on fears of a Federal Reserve Board rate raise, specially in costly growth stocks. Since small-capitalization stocks are more likely to be in their growth phase and are often unprofitable or minimally profitable, they get hit intemperate during “ risk-off ” moments like the one that started 2022. In other words, small-caps tend to underperform during behave markets but surpass in bull markets .
Best small-cap stocks
many small-capitalization companies aren ’ thyroxine family names — at least, not yet. These are some small-capitalization stocks to consider :
1. CarParts.com
once known as U.S. Auto Parts, CarParts.com ( NASDAQ : PRTS ) is an on-line car parts retailer that has been transformed under new management. By consolidating its vane brands under the CarParts.com streamer, the ship’s company has streamlined its business, and sales surged during the COVID-19 pandemic. CarParts.com is investing in engineering and marketing, and the company is quickly adding fresh distribution centers. It can now deliver to 80 % of the country in two days. The e-commerce party besides looks primed for continue growth due to a semiconductor deficit in car manufacture that is boosting newly and use car prices. Over the farseeing terminus, the company is targeting 20 % to 25 % gross growth and 8 % to 10 % adjusted EBITDA, meaning that the store looks like more than just a pandemic narrative .
2. ACM Research
As a manufacturer of clean equipment for semiconductor wafers, ACM Research ( NASDAQ : ACMR ) is a “ picks-and-shovels ” play in the semiconductor diligence. Investing in ACM Research provides exposure to a high-growth diligence without exposure to the risk of commodity chip prices declining. additionally, ACM is a U.S. company that conducts most of its occupation in China, giving investors a relatively safe investing method for gaining exposure to the chinese marketplace. ACM is one of the rare small-capitalization companies that offers both eminent emergence electric potential and solid profitableness .
3. Perion Network
Ad technical school stocks have boomed during the pandemic aboard broad gains in digital advertise and connect television. One big winner has been Perion Network ( NASDAQ : PERI ), an israeli company that focuses on connecting advertisers and publishers through its intelligent hub. That gives it a alone volunteer in an diligence where companies typically cater to brands or publishers.
The caller besides counts Microsoft ( NASDAQ : MSFT ) as a close collaborator ; Perion is helping it monetize its Bing search locomotive. Perion has been growing quickly with acquisitions while establishing a position in premium ads by offering features such as QR scans, customizable backgrounds, and in-game ads during sports events. The company was on lead for 42 % tax income growth in 2021 and 29 % growth in 2022. Like ACM Research, it ’ sulfur besides profitable. hypertext transfer protocol : //www.peterswar.net/quote/nasdaq/acmr/
Best small-cap funds
If you do n’t want to choose individual small-capitalization stocks for your portfolio, you can alternatively gain photograph to small-capitalization companies by investing in a small cap-focused exchange-traded fund ( ETF ) or common fund. here are a couple of options :
- iShares Russell 2000 ETF (NYSEMKT:IWM): This ETF tracks the performance of the Russell 2000, which is considered the leading index of small-cap stocks. The fund’s managers charge an annual management fee of 0.19%, which works out to $1.90 for every $1,000 invested.
- Fidelity Small Cap Growth Fund (NASDAQMUTFUND:FCPGX): This mutual fund invests in small-cap stocks that have high growth potential. It’s actively managed, with the objective of outperforming the Russell 2000, so the fund’s fees — 0.94% annually — are somewhat high compared to most ETFs.
source : Getty Images
Small-cap stocks in 2022
From the commercialize bottom on March 23, 2020, small-capitalization stocks outperformed large caps through 2021, but jitters over expected interest rate hikes from the Federal Reserve have compressed valuations and caused small-capitalization stocks to spiral in January 2022. Since small-capitalization stocks tend to be more volatile, they ’ re more vulnerable to market plunges such as the January 2022 sell-off. If small-capitalization stocks remain under pressure from rising interest rates and worries about the Fed ’ s tightening monetary policy, they ’ re probable to underperform this year. hush, over the retentive condition, you ’ re more likely to find high-growth winners among little caps. even with the pullback, the Russell 2000 still trades at a significantly higher price-to-earnings proportion than the S & P 500, a reflection of the fact that small-capitalization companies tend to have lower profits but more growth potential than their large-capitalization peers .
Should you invest in small-cap stocks?
If you are will to hold an investment for respective years and feel comfortable with the price of a stock fluctuating greatly, then small-capitalization stocks might have a position in your portfolio. Owning small-capitalization stocks can boost your portfolio ‘s overall emergence rate — provided you commit to a buy-and-hold invest scheme. Remember, little companies are more likely to fail than big, established businesses, as was demonstrated during the pandemic. It ‘s significant to conduct the necessary research before investing in any small-capitalization stock. You can besides lower your risk even more by investing in a small-cap-focused fund.
Read more about small-capitalization stocks :
- When to buy small-cap stocks
- How to find small-cap stocks
- How to invest in small-cap stocks
- Are small-cap stocks risky?
John Mackey, CEO of Whole Foods Market, an Amazon subordinate, is a penis of The Motley Fool ’ s board of directors. Jeremy Bowman has positions in ACM Research, Inc, Amazon, CarParts.com, Inc., and Perion Network. The Motley Fool has positions in and recommends Amazon, Microsoft, and Tesla. The Motley Fool has a disclosure policy
