Investors in stocks with small market values know all too well that they usually underperform in down markets. The flip side is that small-cap stocks often lead the way when markets are headed higher again.
Most small-cap investors can't wait for the market to turn. The S&P 500 has lost 16% since it peaked on Feb. 19. As for the small-cap benchmark Russell 2000? It has tumbled more than 25%.
This widespread pain among small caps might give investors pause about digging in. So we decided to suss out which stocks are holding up best, perhaps generating gains, and are set up for continued outperformance once businesses and markets get back to something resembling normal conditions.
Sure enough, even today, there's no shortage of great ideas when it comes to small-cap stocks.
To find the best candidates, we limited ourselves to companies with market capitalizations of between $1 billion and $2 billion. The stocks also had to outperform the S&P 500 since the bear market kicked off almost three months ago.
We further whittled the list down to stocks with an average broker recommendation of Buy or better. S&P Capital IQ surveys analysts' stock ratings and scores them on a five-point scale, where 1.0 equals Strong Buy and 5.0 means Strong Sell. Any score of 2.0 or lower means that analysts, on average, rate the stock a Buy. The closer the score gets to 1.0, the stronger the Buy call. Lastly, we dug into research and analysts' estimates on the top-scoring names.
From that pool, we landed on 11 of the best small-cap stocks that analysts love the most. Read on as we highlight each one.
Market value: $2.0 billion
Analysts' average recommendation: 1.91
Shares in SPS Commerce (SPSC, $56.54) have held up blessedly well in the bear market. The stock is off 5% since the Feb. 19 market top compared to the steep declines of the Russell 2000 Index of small-cap stocks.
With Americans on lockdown, and restaurants and stores closed, supply chains are in disarray. This is SPSC's chance to shine. SPS Commerce provides cloud-based supply chain management systems that help retailers, suppliers, grocers, distributors and logistics firms manage and fulfill orders.
Stifel, which rates shares at Buy, says SPSC is the "market leader for fulfillment and analytics solutions within the retail ecosystem."
"The company has built a competitive moat that has enabled solid wallet share growth and produced a highly recurring revenue stream," Stifel adds.
Of the 11 analysts who cover the stock, five say it's a Strong Buy, two call it a Buy and four rate shares at Hold, according to S&P Capital IQ. They expect the company to generate average annual earnings growth of 20% over the next three to five years - a robust clip that should excite growth investors.
Market value: $1.3 billion
Analysts' average recommendation: 1.75
EverQuote (EVER, $49.56) is an online marketplace for insurance shopping in the U.S. And it's gaining momentum as carriers increasingly lean into digital commerce, says Canaccord Genuity, which rates EVER shares at Buy.
Wall Street's optimistic view of the firm's prospects can be seen in its share-price performance. EVER is up more than 13% since the market started to roll over in February. That beats the S&P 500 and Russell 2000 by roughly 29 percentage points and 39 percentage points, respectively.
The investment thesis is fairly straightforward, says William Blair, which rates EVER at Outperform (equivalent of Buy).
"We believe the insurance industry remains in early innings in its digital shift," William Blair says. "As EverQuote has a differentiated model and competes in several insurance segments (auto, home, renters, life, health, and commercial), we believe the company is in a strong position to take advantage of the industry's digital shift."
Analysts add that the stock should continue to outperform as the large insurance industry continues to shift online.
Wall Street broadly rates EVER as one of the market's best small-cap stocks right now. Three covering analysts tracked by S&P Capital IQ call EVER a Strong Buy, while another four rate it at Buy. Just one analyst is on the sidelines with a Hold recommendation.
Market value: $2.1 billion
Analysts' average recommendation: 1.70
Several pharmaceutical and other health care stocks are jumping because of their work on developing vaccines and treatments for COVID-19. But that doesn't mean work has stopped on thousands of drugs being developed for everything else.
One such company that continues to chug along is Arvinas (ARVN, $52.70). This clinical-stage biopharmaceutical company creates therapies for the treatment of certain cancers.
ARVN's prospects are good enough that Wedbush put it among the few small caps on its Best Ideas List, applauding the company's development of a class of targeted therapeutics called PROTACs, which are designed to degrade disease-causing proteins.
"We continue to view ARVN's PROTAC platform as potentially transformational and see striking advantages over traditional therapeutic modalities such as small molecules and antibodies," notes Wedbush, which rates the stock at Buy.
Wedbush isn't alone. Of the 10 analysts covering ARVN, four call it a Strong Buy, five say Buy and one calls it a Hold. Their collective target price of $60.08 gives the stock implied upside of 14% over the next 12 months or so.
Market value: $1.4 billion
Analysts' average recommendation: 1.57
The insurance industry is bracing for fallout from the coronavirus pandemic, but not every stock in the sector is preordained to suffer.
Analysts are bullish on Palomar Holdings (PLMR, $56.25) in part because the specialty property insurance firm has what William Blair says is "has minimal exposure to COVID-19 from a balance sheet and underwriting perspective."
Indeed, as a specialty P&C insurer that offers products such as earthquake and hurricane insurance, PLMR is concerned with catastrophes other than COVID-19. And fear of such events can be beneficial.
"Recent seismic activity could provide upside given the potential for upward pressure on demand for earthquake products," notes William Blair, which has the stock at Outperform.
While small-cap stocks in the financial space might seem especially risky right now, Wall Street clearly favors PLMR. Three pros covering the stock say it's a Strong Buy, while another four say Buy. Collectively, they expect Palomar to improve its earnings by 18% year-over-year in 2020, and by another 20% in 2021.
Market value: $1.3 billion
Analysts' average recommendation: 1.50
The company develops and publishes a large portfolio of free-to-play mobile games for smartphones and tablets. Some of GLUU's more popular titles include Deer Hunter, QuizUp, MLB Tap Sports Baseball and Kim Kardashian: Hollywood.
Glu Mobile's stock is up almost 19% since the bear market began in mid-February, and analysts see more outperformance ahead. Seven rate the stock at Strong Buy and two say Buy. Only one analyst is taking the other side, calling GLUU a Sell.
"Due to several large recurring properties, Glu Mobile should be a key beneficiary of the stay-at-home mantra that has emerged in response to coronavirus," says Wedbush, which rates GLUU at Buy.
Further out, analysts are bullish on the small-cap stock's new and expected releases, such as Disney Sorcerer's Arena. Wall Street estimates that and other releases will help spark annual profit expansion of 15% over the next three to five years.
Market value: $1.4 billion
Analysts' average recommendation: 1.50
Marten Transport (MRTN, $24.73) is another company whose importance has been underscored by the coronavirus lockdown.
The company operates as a temperature-sensitive truckload carrier. Marten specializes in serving shippers that transport food and other consumer packaged goods requiring a temperature-controlled or insulated environment.
MRTN has been on the right track for years, analysts say.
"Over the last several years, the company has successfully diversified from being a long-haul temperature-controlled carrier into one also offering regional, dedicated, international, intermodal and brokerage services to include not only large shippers but a significant number of rapidly growing smaller customers," says Stifel, which rates shares at Hold, but mostly because of valuation.
Indeed, MRTN is up almost 8% since the market peaked in February, besting the broader market by about 24 percentage points.
Still, Stifel is alone in its middle-of-the-road stance. The other three analysts covering Marten call shares a Strong Buy. And as a group, those pros see next year's profits rising 19% to $1.15 per share.
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Market value: $1.6 billion
Analysts' average recommendation: 1.38
AtriCure (ATRC, $41.06) is another health care stock rising independently of any boost from the pandemic or lockdown.
The medical device maker develops, manufactures and sells devices for cardiac ablation surgery, as well as related products. Its EPi-Sense guided coagulation system is used for the coagulation of tissue. ATRC also provides multifunctional pens that allow surgeons to evaluate cardiac arrhythmias; perform temporary cardiac pacing, sensing, and stimulation; and ablate cardiac tissue with the same device.
A rapidly aging population bodes well for a company that helps treat heart diseases, which are the leading cause of death globally.
"AtriCure's highly differentiated, and expanding, suite of atrial fibrillation treatment technologies will continue to demonstrate meaningful top-line growth potential," notes Stifel, which rates the stock at Buy. "On top of a solid commercial foundation, the company has multiple tailwinds that include: recently positive, updated clinical guidelines; an expanding and increasingly productive sales force; and a steady cadence of pipeline product launches."
ATRC held up better than most small-cap stocks when the market crashed. Shares are off just 2.6% since the great drawdown began in February. That's roughly 24 percentage points better than the Russell 2000.
Right now, the average analyst price target stands at $47.13, which gives ATRC implied upside of about 15% in the next year or so. And each of the eight analysts covering AtriCure that are tracked by S&P Capital IQ are bullish: Five call it a Strong Buy, while the other three say Buy.
Market value: $1.3 billion
Analysts' average recommendation: 1.33
1-800-Flowers.com (FLWS, $20.55) is on quite a run these days. Shares have gained 14% since the February market top to outperform the S&P 500 by a whopping 30 percentage points.
The lockdown hurt the company's business of selling gourmet food and floral gifts - at first. But it has rebounded rather quickly.
"While there is significant uncertainty in the overall consumer environment due to the COVID-19 crisis, we are seeing very strong e-commerce demand for our Gourmet Food and Gift Baskets and our floral products for holidays and everyday gifting occasions," CFO William Shea said on a conference call with analysts following the company's fiscal third-quarter earnings report.
FLWS beat the Street's expectations for earnings and revenue when it reported results at the end of April. The company also issued upbeat guidance as it begins to get a tailwind from the lockdown.
"Demand has increased significantly as consumers are increasingly turning to the 1-800-Flowers brand to help them express themselves and stay connected," CEO Chris McMann said.
Five analysts covering the stock rate it a Strong Buy and one says it's a Hold, putting FLWS among the best small-cap stocks, in Wall Street's view. Their average price target of $23.17 gives 1-800-Flowers implied upside of about 13% over the next 12 months or so. Looking farther out, analysts expect the company to generate average annual earnings growth of 21% over the next three to five years.
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Market value: $1.1 billion
Analysts' average recommendation: 1.17
Shares in Inseego (INSG, $11.70) have popped a remarkable 27% since the bear market began in mid-February, helped by the new normal of people being stuck at home.
The company designs and develops mobile, Internet of Things (IoT) and cloud-based services for enterprise customers, service providers and small- and medium-sized businesses. For example, INSG provides wireless 3G, 4G and 5G hardware products for the federal government's First Responder Network.
"Inseego is seeing strong demand driven by the work from home, distance learning and telehealth trends, with this momentum set to continue," says Lake Street Capital Markets, which rates the stock at Buy.
Accelerating sales are expected to help the company swing to profitability in 2021. Canaccord Genuity, which rates the stock at Buy, bases its bull case on the demand surge for mobile products. On a longer horizon, the analysts say INSG will benefit from the growth of 5G networking.
Analysts expect the company to deliver average annual earnings growth of 20% over the next three to five years, according to S&P Capital IQ. Five analysts rate the small cap at Strong Buy, and one has it at Buy.
Market value: $1.6 billion
Analysts' average recommendation: 1.09
Shares in biopharmaceutical company Dicerna Pharmaceuticals (DRNA, $21.92) are up 8% since the market rolled over. Analysts say there's more where that came from.
Of the 11 pros who cover the stock tracked by S&P Capital IQ, 10 rate it at Strong Buy and one calls it a Buy.
DRNA develops treatments for diseases involving the liver, including primary hyperoxaluria, and a drug for chronic hepatitis B virus infection.
Stifel, which rates the stock at Buy, points to the "company's continued pursuit of wholly-owned rare disease assets" and its "broad strategic partnerships with partners Roche, Novo Nordisk, Alexion, Lilly and Boehringer Ingelheim" as part of the bull case.
With an average target price of $33.56 target, DRNA has implied upside of more than 50% over the next 12 months or so. That potential makes DRNA one of the best small-cap stocks to buy right now, if you can stomach the risk of a small biotech play.
Market value: $1.7 billion
Analysts' average recommendation: 1.0
STAAR Surgical (STAA, $38.00) derives a good deal of its revenue from China, so investors are breathing a sigh of relief as the country slowly opens up again.
STAA develops, manufactures and sells implantable lenses for eyes, as well as the delivery systems to place the lenses into the eyes. An aging global population should provide the company with ample demand from nearsighted customers.
The company's China distributor accounted for more than 43% of consolidated net sales during fiscal 2019, STAA notes. Canaccord Genuity says STAA is bouncing back sooner than expected in China, and the bigger picture is brightening too.
"We continue to believe the products the company offers have a large market of primarily myopia patients to penetrate across the globe, the products do have competitive advantages over other offerings for myopia, and the pipeline is not broken, albeit likely pushed back a bit," notes William Blair, which rates the stock at Outperform.
However, among the headwinds facing the company is the fact that "refractive care procedures are discretionary and expensive," William Blair's analysts write. "While there is no telling what the duration of any such (pandemic) slowdown will be ... we do think the macroeconomic risks are higher than they have been in our time covering the stock."
STAA is nonetheless tops among these 10 best small-cap stocks. All six analysts covering it rate it a Strong buy, and forecast long-term average annual earnings growth of 30%.
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Copyright 2020 The Kiplinger Washington Editors