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Small Stocks To Buy Now

Oftentimes, companies which fly under the radar can avoid much of the broader market chaos. And, in particular, small-cap stocks tend to be more domestic in nature, which insulates them from the geopolitical shocks and foreign exchange swings which have tripped up many multinational companies lately. In addition to these specific advantages, U.S. small-cap stocks have historically outperformed their larger peers by a significant margin over a long time horizon. With that in mind, these nine companies look like some of the best small-cap stocks to buy for 2023 and beyond:

small stocks to buy now

Diversey is a company focused on sanitation and hygiene services. It is the second-largest firm in America in this category, though it is far smaller than the leader, Ecolab Inc. (ECL). Therein lies the investment opportunity. Ecolab has a market cap of greater than $40 billion and trades for 33 times forward earnings. Diversey's valuation is around $2 billion and trades for less than 15 times forward earnings. Now, to be fair, there's an explanation for this. Diversey recently went public after being owned by private equity. Previous ownership seems to have mismanaged the business, and it earns far lower profit margins than Ecolab. There is some skepticism that Diversey can catch back up to Ecolab on a competitive level. But with Diversey stock down more than 60% from its 2020 IPO, that risk is reflected in the share price. Meanwhile, Diversey should benefit as its key clients like restaurants and hotels see business continue to recover from the pandemic disruption.

Fastly was formerly far more than a small-cap stock. For a brief shining moment, FSLY stock hit $120 per share during the recent tech boom as the sky was the limit for companies providing cloud computing infrastructure. Since then, however, economic reality has weighed on the sector. Fastly shares are now down more than 90% from their 2020 peak. Fastly has grown revenues at a rapid clip, but it wasn't able to control its operating costs during that period. As a result, the company remains unprofitable today, even as adoption of its product has boomed.

Ruth's Hospitality is the corporate parent of the high-end steakhouse chain Ruth's Chris. The company has 150 domestic restaurants, with a nearly 50/50 split between company-owned and franchisee locations. It has another 23 locations overseas in markets as far away as Japan, Hong Kong and Singapore. While that's a small store count by chain standards, Ruth's Chris makes up for it on volume. In 2019, the average company-owned location brought in a mouth-watering $5.5 million of revenue. That figure should climb to new highs going forward as the restaurant industry recovers from the pandemic. Additionally, Ruth's Chris formerly focused just on dine-in, but has embraced digital channels over the past couple years. Shares declined in 2022 amid surging beef prices, which hit margins. But as inflation recedes, profits should grow. As it is, shares trade for just 14 times earnings and offer a 3.7% dividend yield.

Small-cap stocks (opens in new tab) tend to suffer more than their larger cap peers when equities are broadly struggling, and 2022 was no exception. But if there's a sliver of a silver lining to be found, it's that analysts say the best small-cap stocks to buy are priced for exceptional returns in 2023.

First, let's take a look at the 2022 tape: The small-cap benchmark Russell 2000 Index generated a total return (price appreciation plus dividends) of -20.4% for the year-to-date through Dec. 16. That trailed the S&P 500's total return of -17.9%.

By the same token, however, small-cap stocks also tend to outperform the broader market when equities are catching a bid. No one can know for certain if we've already seen the bottom of our current bear market (opens in new tab). Once the equity malaise lifts, however, the best small-cap stocks to buy should theoretically be among the market's top outperformers.

In order to get an idea of where these outsized potential returns might be hiding, we turned to Wall Street analysts to find the best small-cap stocks to buy for 2023. To that end, we screened the Russell 2000 for analysts' top-rated small-cap stocks.

We further limited ourselves to stocks with at least 10 Strong Buy recommendations (opens in new tab) (in order to ensure adequate analyst coverage and sample size). Lastly, we dug into research, fundamental factors, valuation, analysts' estimates and other data on the top names.

Biotech stocks (opens in new tab) held up well in an otherwise terrible 2022. Indeed, the benchmark Nasdaq Biotechnology Index was off 10% for the year-to-date through mid-December. That's downright defensive compared to the broader market's loss of 19% over the same span.

Alas, shares in a number of small-cap biotechs, such as Fate Therapeutics (FATE (opens in new tab)), did not go along for the ride. FATE is developing cell-based therapies to treat cancer (opens in new tab). Although clinical trials thus far have impressed the Street, the stock lost more than three-quarters of its value in 2022.

Of the 23 analysts covering FATE tracked by S&P Global Market Intelligence, 15 call it a Strong Buy, four say Buy, three have it at Hold and one says Sell. That works out to a consensus recommendation of Buy, with high conviction to boot. As such, FATE easily makes the list of analysts' best small-cap stocks to buy for 2023.

Of the 22 analysts covering ARVN tracked by S&P Global Market Intelligence, 13 rate it a Strong Buy, six say Buy and three have it at Hold. What should really capture the attention of investors seeking out the best small-cap stocks, however, is the Street's average target price.

At $83.62, analysts collectively give ARVN implied upside of more than 130% in the next 12 months or so. That sort of potential return helps explain why ARVN makes any list of the best small-cap stocks to buy for 2023.

Of the 17 analysts covering the stock tracked by S&P Global Market Intelligence, 11 rate DNLI at Strong Buy, four say Buy and two have it at Hold. Their average target price of $64.47 gives the stock implied upside of about 125% in the next 12 months or so. Little wonder, then, that DNLI makes the list of best small-cap stocks to buy for 2023 and beyond.

Axsome's therapies in various stages of development include treatments for Alzheimer's disease (opens in new tab), migraines and narcolepsy, among other illnesses. But it's the company's progress with AXS-05, a treatment for major depressive disorder that's set for expansion to indications, that has the Street in love with this small-cap stock.

True, clinical-stage biotech stocks are speculative, but analysts love Karuna's chances. Of the 19 analysts covering KRTX tracked by S&P Global Market Intelligence, 13 rate it at Strong Buy and six call it a Buy.

Rocket Pharmaceuticals (RCKT (opens in new tab)) is another small-cap biotech with promising drugs under development, and it currently tops the list of Wall Street's favorite small-cap stocks to buy now.

Indeed, with a consensus recommendation score of 1.20, RCKT is a high-conviction Strong Buy. As with all such stocks in its sector, caution is warranted. Names like RCKT are speculative (opens in new tab), lest we forget.

Of the 15 analysts covering RCKT tracked by S&P Global Market Intelligence, 12 rate it at Strong Buy and three call it a Buy. Shares were up about 2% for the year-to-date through Dec. 16, and with an average price target of $52.46, the Street expects them to more than double in 2023. That's the kind of potential return investors should expect from the best small-cap stocks to buy for 2023.

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.

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.

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.

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:

Small-cap stocks have underperformed large-cap stocks, and recent manufacturing and services industry data increases concerns that profits could stagnate. The risk of decelerating economic activity to small-cap stocks shouldn't be ignored, but that doesn't mean there aren't sectors, industries, and stocks you can buy.

After aggregating our ratings on over 1,600 stocks by sector, the top-ranked small-cap basket is industrial goods, led by AAR Corp. (AAR), Cavco Industries (CVCO), Beazer Homes (BZH), Aegion Corporation (AEGN), and Hovnanian Enterprises, Inc. (HOV).

The services, financials, REITs, and technology sectors are neutral-rated, with scores that are roughly in line with the average universe score. Below-average scores in basic materials, utilities, consumer goods, and healthcare suggest small-cap investors are best off staying industry and stock-specific in those sectors for now. 041b061a72


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