Top Ten Small-Cap Stocks to Buy

Large-cap companies are typically more mature, resulting in lower volatility during turbulent market conditions as investors gravitate towards quality and adopt a more risk-averse stance. Over the last year, many investors have gravitated to the Mega-Cap stocks on fears of rising interest rates, inflation concerns, and a potential recession. Historically, March has been a great time to buy the dip in small-cap stocks, as showcased in the iShares Core S&P Small-Cap ETF (IJR) seasonality chart.

While shares of small-cap and mid-cap companies may offer more affordability compared to large caps, they also tend to experience higher price volatility due to their smaller size, especially during periods of rising interest rates. Small companies tend to have more debt, negatively impacting their stocks during a raising rate environment.

However, with this scenario largely baked into the market and economy, there could be a potential market rotation on the horizon with the prospect of interest rates declining later in 2024 or early 2025. Better-than-expected economic data has aided the major indexes year-to-date, with the S&P 500 breaking 5000 for the first time in history. Fourth quarter GDP grew 3.3%, prompting S&P Global Ratings to boost forecasts, and despite Mega-Cap stocks continuing to rise, the promising GDP forecast and extreme greed indicator could be a sign that there may be a rotation to small-cap stocks.

Fear & Greed Index

Small-cap stocks can offer significant growth upside but come with higher risk and uncertainty than large-cap stocks. Small caps often trade at a lower price relative to fundamentals and can be more rewarding as they transcend to large-cap stocks. Over the last year, major indexes have gained tremendous momentum, led by the Magnificent Seven. Despite peak inflation and macroeconomic challenges, many investors have been keen on flocking to stocks with high upside potential. The hype and desire to make money fast versus investing when the economy’s overall health is rising may tempt investors to jump head-first into rising performance and may result in a “melt-up.” With many fast-growing companies, consider filtering small-cap stocks using Seeking Alpha Quant Ratings and Factor Grades. Overall 100 metrics are captured and graded across five factors: Valuation, Profitability, Growth, Momentum, and EPS Revisions. Risk and firm size are two components not explicitly listed under the Factor Grades that also impact the overall Quant Rating.

10 Small-Cap Stocks: Booming Growth and Momentum

The ten stocks on SA Quant Team’s select list of small-cap stocks have solid momentum, a strong record of growth in sales and profits and, according to consensus estimates, solid growth targets.

10 Top Small-Cap Stocks

Just in time for March Madness, SA Quant’s top ten small-cap companies – like many underdog basketball teams – may offer upside potential for investors.

1. GigaCloud Technology Inc. (GCT)

• Market Capitalization: $1.41B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 3/11/24): 4 out of 524

• Quant Industry Ranking (as of 3/11/24): 1 out of 5

GigaCloud Technology Inc. provides end-to-end B2B e-commerce solutions for large parcel merchandise and is number one on the list of quant-rated Distributor industry stocks. GCT’s A+ Momentum Factor Grade is driven by mind-boggling price performance, up over 590% in the past year, crushing the S&P 500 and Nasdaq.

GCT Stock Performance vs. S&P 500 vs. Nasdaq

Based on the consensus estimates of sell-side analysts, in FY24 GCT is expected to reach $1.03 billion in revenue and EPS is expected to grow 17%. GigaCloud has beaten earnings expectations in four consecutive quarters. GCT’s Growth Factor Grade is driven by explosive revenue growth, +25% year-over-year, ~570% above the sector. GigaCloud’s EBITDA growth YoY is +175%, EBIT +181%, YoY EPS Diluted Growth is +3,600%, and ROE YoY is +116% . Forward EPS growth is at +40%, and forward levered FCF is over 1,200%. GCT’s Profitability is strong relative to the sector, highlighted by a 15% operating margin, 15% levered FCF margin, and ROE of 28%. Although the company trades at a relative premium as displayed by a C- Valuation Grade, its trailing PEG GAAP of 0.01x is 99% below the sector median.

2. Forestar Group Inc. (FOR)

• Market Capitalization: $1.87B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 3/11/24): 1 out of 171

• Quant Industry Ranking (as of 3/11/24): 1 out of 2

Forestar Group is a residential lot development company, Quant-ranked #1 among Real Estate stocks, and is up over 150% in the past year, yet continues to trade at an extreme discount. Boasting one of the largest single-family community developments in the U.S., if the housing market improves, FOR stands to gain significantly through 2024. FOR’s Valuation Grade is an ‘A,’ highlighted by forward P/E ratios ~70% difference to the sector. Forestar revenue is projected to reach almost $1.7 billion by FY 2025, with tailwinds from housing recovery, given the lack of inventory and increasing home construction.

Forestar Group’s normalized EPS of $0.76 beat by $0.26 in the latest quarter, and sales of $305 million (+40% YoY), beating by $42M, prompting four upward revisions in the past 90 days. EPS for the year ending September 2024 has been revised upward by over 50% in the past 6 months, a positive signal for those considering this stock for a portfolio.

3. NewLake Capital Partners, Inc. (OTCQX: NLCP)

• Market Capitalization: $350.75M

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 3/11/24): 2 out of 171

• Quant Industry Ranking (as of 3/11/24): 1 out of 12

NewLake Capital Partners, Inc. is a REIT that provides real estate capital to state-licensed cannabis operators through sale-leaseback transactions and third-party purchases and funding for build-to-suit projects. NLCP is the number 1 quanted rated Industrial REIT industry stock and tops among Real Estate Stocks. Cannabis industry sales are projected to grow at a CAGR of 14% from 2024-2028, reaching over $102 billion.

NLCP has A’s across the board, besides a B in Revisions, and a solid Dividend Scorecard, sporting a yield of +9% and forward dividend per share growth of +53%. NLCP has A’s in all but 3 of 19 underlying Valuation Factor Grade metrics. NLCP is trading at ~9x Adjusted Funds From Operations (FFO), a key REIT industry indicator. NLCP has an EV/EBITDA ratio of 8x and EV/EBIT is at 12x. Total debt/equity is 0.48% vs. the sector’s 98%.

NewLake Capital has an A+ Profitability Grade with an AFFO margin of 90% and EBITDA margin of 87%. NLCP’s Levered FCF margin is 63%, Net Income 52%, and Net Income/Debt ratio is over 1,200%. The stock is up 15% in the past three months vs. the sector’s +0.03%.

4. Blue Bird Corporation (BLBD)

• Market Capitalization: $1.04B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 3/11/24): 6 out of 648

• Quant Industry Ranking (as of 3/11/24): 1 out of 38

Blue Bird Corporation is up 60% in the past year and is a top-ten quant-rated Industrial stock. Ranked #1 in the Construction Machinery and Heavy Trucks industry, Blue Bird offers replacement parts and builds and sells school buses internationally. The Georgia-based bus builder sells products through a network of dealers and directly to private fleet operators and U.S. federal and state governments. Blue Bird showcases solid Profitability metrics, including ROE, ROTC, ROA, and Asset Turnover Ratio, all significantly outperforming the sector. Blue Bird delivered record financial results with Q1 top-and-bottom-line earnings beats that included an EPS of $0.91, beating by $0.58, and revenue of $317.66M, which beat by nearly 35% YoY.

Strong market demand and its alternative-power mix have led to increasing profit margins at record levels, a robust backlog, record EV production and orders, resulting in increased full-year guidance. Despite trading near its 52-week high, Blue Bird’s A- Valuation Grade comes at a discount, as highlighted by a forward P/E Growth (PEG) ratio of 0.38x, over 70% below the sector median. Blue Bird’s forward EV/EBITDA and EV/EBIT ratios are about 30% under the sector, and given its forward sales growth is at 21% and forward EPS long-term growth is +37%, it should be no surprise why six analysts have revised up in 90 days.

5. RADCOM Ltd. (RDCM)

• Market Capitalization: $78.76M

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 3/11/24): 23 out of 551

• Quant Industry Ranking (as of 3/11/24): 9 out of 192

RADCOM Ltd. is an Israeli-based provider of 5G network intelligence solutions to communication service providers. RDCM has grown steadily since 2019, from $33 million in sales to $51.6 million in FY2023. In Q423, EPS of $0.25 beat by $0.10 and revenue of $14 million (+14% YoY) beat by $458k. The company posted gross profit margin (TTM) of 73%, lowered operating expenses -5% YoY, while growing EBIT. RADCOM has $82.2 million in cash on the books and no debt.

RDCM revenue is projected to grow 11% in each of the next two years, to reach over $64 million in 2025, according to consensus estimates. Operating and levered FCF grew over 200% YoY and EBIT growth forward is over 100%, driving a B+ Growth Grade. RDCM has 2 earnings up revisions in the past three months, with EPS projected to grow over 50% in FY2024 and +37% in FY25. RDCM’s ‘B’ Valuation Grade is underpinned by a P/E Non-GAAP FWD of 17x and EV/EBIT FWD ratio of 13x.

6. ANI Pharmaceuticals, Inc. (ANIP)

• Market Capitalization: $1.33B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 3/11/24): 29 out of 1080

• Quant Industry Ranking (as of 3/11/24): 8 out of 204

ANI Pharmaceuticals, Inc. (NASDAQ: ANIP) is among the top SA-quant rated Pharmaceutical Stocks. The Minnesota-based maker of branded and generic prescription drugs marketed through retail pharmacy chains, wholesalers, distributors, mail order, group purchasing organizations, and hospitals. ANI, up 60% in the past year, says it holds the second highest number of CGT approvals in the U.S. generics market. ANI finished 2023 with $486.8 million in revenue (+54% YoY) and adjusted EBITDA of $133.8 million (+140%). ANI Q423 EPS of $1.00 beat by $0.15, and revenue of $131.65 million (+40% YoY) beat by $6.72 million. ANI beat earnings for six straight quarters and has 2 up revisions in the past three months. ANI revenue growth was solid across rare disease, generics and established brands in 2023. ANI also has a forward EBITDA growth of +40%, and +52% YoY growth in working capital, driving a B+ Growth Factor Grade.

ANI EBITDA margin (TTM) is 22% vs. a sector median of 5% and levered FCF margin of 23% crushes the sector median of 0.5%, contributing to an ‘A’ Profitability Grade. ANI’s Valuation Grade is a C, although P/E Non-Gaap (FWD) of 14x is ~20% below the sector, EV/EBITDA forward of 10.09x is over 20% below the sector median, and p/cash flow of 11x is over 30% below the sector.

7. Apogee Enterprises, Inc. (APOG)

• Market Capitalization: $1.25B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 3/11/24): 34 out of 648

• Quant Industry Ranking (as of 3/11/24): 3 out of 41

Apogee Enterprises, Inc. designs and develops glass and metal products and services in the U.S., Canada, and Brazil, with nearly $1.4 billion in annual revenue (TTM), and is among the top SA Quant-rated Building Products Stocks. APOG’s stock price is up over 20% in the last year and +15% in the past three months. APOG diluted EPS has grown almost 60% YoY and EPS growth forward is at an amazing +211%, driving an ‘A’ Growth Grade. APOG has a strong earnings record, beating EPS for nine quarters straight, and 11 out of the last 12, and has 3 earnings up revisions in the past three months. APOG’s forward P/E growth (PEG) ratio is at 1.22, about 30% below the sector median.

APOG’s ‘B’ in Profitability is highlighted by ROE of 25% and ROTC of 14%. Apogee’s Dividend Scorecard looks solid with an A- Safety Grade in addition to a strong track record of consistency. APOG has 34 consecutive years of dividend payments and 12 straight years of dividend growth.

8. Ardmore Shipping Corporation (ASC)

• Market Capitalization: $651.79M

• Quant Rating: Buy

• Quant Sector Ranking (as of 3/11/24): 10 out of 237

• Quant Industry Ranking (as of 3/11/24): 6 out of 55

Bermuda-based Ardmore Shipping Corporation engages in the seaborne transportation of petroleum products and chemicals worldwide and is #6 among the top quant-rated Oil and Gas Storage and Transportation stocks. Ardmore’s financials and strong balance sheet have been improving as the demand for tanker shipping increases. ASC levered FCF grew 36% YoY and operating cash flow 28%. ASC’s EBITDA margin is almost 40%, net income nearly 30%, and levered FCF margin about 24%, for an ‘A-’ Profitability grade. Ardmore continues to trade at a discounted valuation, as showcased by a forward P/E ratio of 5x versus the sector’s 11.27x. ASC has 4 up revisions to 1 down revision in the last 3 months.

9. Palomar Holdings, Inc. (PLMR)

• Market Capitalization: $1.85B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 3/11/24): 65 out of 691

• Quant Industry Ranking (as of 311/24): 7 out of 46.

Palomar Holdings, Inc. (PLMR), among the top stocks in the Property and Casualty Insurance industry, is up 30% in the past year and has an ‘A’ Growth Grade due to sales growth FWD of nearly 20%, operating profit FWD of +20%, and long-term EPS forward of almost 20%. PLMR has six up earnings revisions vs. 1 down revision in the past 90 days, with consensus EPS projected to grow 14% in FY24 and +20% in 2025, and sales forecast to grow 25% in FY24 and +23% in FY25. PLMR has a D in Valuation but a forward P/E growth (PEG) ratio of 0.88x, which is more than 30% below the sector median.

10. Collegium Pharmaceutical, Inc., (COLL)

• Market Capitalization: $1.20B

• Quant Rating: Strong Buy

• Quant Sector Ranking (as of 3/11/24): 62 out of 1080

• Quant Industry Ranking (as of 3/11/24): 15 out of 24

Collegium Pharmaceutical, Inc., up over 50% in the past year, engages in the development and commercialization of pain management medicines. COLL has an A+ Profitability Grade, with sector crushing margins including gross profit (85%), EBIT (33%), EBITDA (60%), and levered FCF (48%). COLL’s ‘B’ Growth Grade is driven by forward EPS growth of about +20%, forward EBIT growth ~+90%, and levered FCF FWD +140%. Collegium said it expects record-level revenue and adjusted EBITDA in FY24, according to financial guidance.

Concluding Summary

Small-cap stocks can provide more growth potential than larger-sized peers, although they come with more risk and share prices more volatile. Seeking Alpha Quant Ratings and Factor Grades can help investors deal with uncertainty by presenting solid quant-vetted stocks. The SA Quant team has ten fundamentally strong companies for investors looking for fast-growing small caps with solid momentum. In addition to many top small-cap stocks, if you’re seeking a limited number of monthly ideas from the hundreds of top quant Strong Buy rated stocks, the Quant Team’s best-of-the best, consider exploring Alpha Picks.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.