Best Small Cap Stocks Right Now

When interest rates are low, small-cap stocks begin to shine and outpace larger companies in value. These stocks are stocks with a market capitalization between $300 million and $2 billion. These stocks are just one of many asset classes you can hold in your investment portfolio to add a unique layer of diversification and potential, no matter where you are in your investing journey. 

Finding small-cap stocks to buy is more about knowing which companies are performing over the long term, instead of trying to make a few bucks overnight.

Quick Look at the Best Small Cap Stocks:

• Allied Motion Technologies
• Hovnanian Enterprises Inc
• YETI
• IBEX Holdings, Ltd
• CarParts.com Inc
• Eastman Kodak Co

Overview: Small Cap Stock

When you own a small-cap stock, it means that you own a share of a corporation with a smaller total market capitalization. These stocks are most often found in the tech, industrial, healthcare and financial service sectors. Some examples of companies trading as small-cap stocks include:

• Southwestern Energy Company (NYSE: SWN)
• eHealth, Inc. (NASDAQ: EHTH)
• Cogent Communications Holdings, Inc. (NASDAQ: CCOI)
• LHC Group Inc (NASDAQ: LHCG)

These stocks typically have a total market capitalization of around $300 million to $3 billion — though these numbers aren’t set in stone. Market caps can fluctuate as the market does. Companies with less than $300 in market capitalization are usually considered “micro-cap” stocks, while those larger than $3 billion are generally considered “mid-cap” stocks.

Like large- and mid-cap stocks, there’s an index that tracks the performance of small-cap stocks as a whole. The Russell 2000 Index tracks the performance of the top 2,000 stocks in the country, excluding any company that’s trading for less than $1 per share. This is one of the best times for investors to buy at the dip.

These stocks can make a great addition to any portfolio because they have the potential for larger growth movements. This means that if you choose the right stocks, you’ll see more profits when compared to mid- and large-cap stocks that are moving at similar rates. Many small-cap stocks are also value stocks, which is good news for investors searching for stocks under $5. 

Best Online Brokers for Small Cap Stock

Before you can begin investing in these types of stocks (or any type of stock) you need to open an account with a broker. Browse our favorite online brokers when you find the best stocks to buy.

Features to Look for in Small Cap Stocks

These types of stocks tend to represent smaller or newer companies. This means that you should adjust your expectations when it comes to earnings, debt and growth.

Some key characteristics to look for when you compare these stocks include:

• A trend toward lowering debt: Almost every small-cap stock will have some form of debt. In the cases of new tech companies, this debt often dwarfs the profits the company is returning in its early years. But more debt doesn’t need to be a killer — instead of looking at debt by dollar amount, compare this company’s current debt to the debt it reported last year. You should see a downward trend, and the company’s assets should be higher than its debt level.
• A lower price-earnings (P/E) ratio: A company’s P/E ratio compares a company’s profit to its current stock price. Stocks with a low P/E ratio can be an undervalued hidden gem. On the other hand, a high P/E ratio can indicate that a stock is overvalued and likely to see a drop in price.
• A trend toward year-by-year growth: When you compare these stocks, you should see upward growth every year. Because these offerings have much smaller starting sizes at the beginning of each quarter, promising small-cap stocks will show much more growth than mid- or large-cap stocks. 
• Predictability: While it’s impossible to predict the movement of a stock, you should review the charts to ensure the stock is not on a roller coaster ride. It’s one thing to rally and experience selloffs, but it’s quite another to wildly traverse the chart in a manner that is difficult to understand.

Accenting Your Portfolio With Small Cap Stock

With a large potential for growth and plenty of stocks under $10, small-cap stocks can be attractive. However, it’s important to remember that these stocks can also quickly lose value — and they may also show lower liquidity, which can mean trouble if you need to quickly exit your position. 

Do your due diligence before you purchase a small cap stock, and only use small-cap stocks to complement a portfolio primarily made up of solid and safe index funds, mutual funds, bonds and large-cap offerings. The best stocks to buy are only one part of your portfolio, but they can add significant value when chosen properly.