Small-cap stocks are among the most exciting — and most misunderstood — corners of the market.
Ask your average investors what they think of when they hear "small cap," and you'll get one of two answers: scrappy startups on the verge of breaking out, or risky, thinly traded names they wouldn't even buy with someone else's money.
They wouldn't necessarily be wrong. But that's only part of the story.
Small-cap stocks occupy a distinct space in the market. They're big enough that they're generating significant revenue and getting real analyst coverage. But they're small enough that they're still flying under most radars, so it's possible Wall Street hasn't fully priced in their potential. That goes for the highfliers you'd expect, but also the more grounded, cash-generating businesses that occupy the space.
If you're interested in learning more about identifying investment-worthy small caps, read on. I'll define the group, explain why investors are drawn to smaller companies, then show you how to find the best small-cap stocks on your own.
What are small-cap stocks?
For the newbies out there, the term "cap" refers to a company's market capitalization, which is calculated by multiplying a company's stock price by its number of shares outstanding.
A small-cap stock is any company worth $250 million to $2 billion by market cap.
In a fair and just world, that would be the end of this section. But as I pointed out in my exploration of mid-cap stocks, it's not that simple, life is unfair, and we can't have nice things.
In some cases, the difference is small — a few institutions peg the small-cap range at $300 million to $2 billion. Not much to quibble over there. But then there's the S&P SmallCap 600, whose range includes much bigger companies of between $1.2 billion to $8 billion. And those thresholds have ticked higher over time.
A small-cap stock is any company worth $250 million to $2 billion by market cap.
Other definitions are even more fluid, looking at small caps not as some fixed bracket of value, but as a percentage of the overall market. Morningstar, for instance considers small-cap stocks to be any stocks within the bottom 10% of the overall equity market, which over the past few years has put the upper bound in the $10 billion to $15 billion.
And then there's the ubiquitous Russell 2000 Index. This premier small-cap benchmark is made up of 2,000 of the smallest stocks within the Russell 3000 Index, which represents the 3,000 largest securities in the U.S. equity market. Currently, the largest component of the Russell 2000 right now is Bloom Energy (BE), which was around $4.3 billion when it joined the index, but is $90 billion now.*
There's no "correct" small-cap range. But, as we'll get into in a minute, there are certain general tendencies the larger or smaller a stock is.
Lastly, you'll notice most of the above definitions also have a lower bound. Companies smaller than those thresholds are slapped with "microcap" or "nanocap" designations. The Russell Microcap Index is equally maddening, made up of the smallest 1,000 companies in the Russell 2000, and the next smallest eligible 1,000 companies outside the Russell 3000.
Why do investors buy small-cap stocks?
As I mentioned before, small-cap companies aren't a monolith. The size category includes growth and value stocks alike – you could just as easily run across a disruptive technology company as you could a stodgy regulated utility.
But there's a reason small caps are more often associated with growth stocks.
The business rule of large numbers dictates that the larger a company gets, the more difficult it becomes to maintain high-percentage growth rates in revenue and net income — two primary drivers of stock prices.
Put simply: It's easier for a $500 million company to double its revenue than it is for a $500 billion company. And potential stock upside follows similar logic.
Small-cap stocks also don't attract as much media attention, and there's less Wall Street coverage of these firms. With fewer eyes watching, mispricings are more likely, and patient investors who do their homework can capitalize on these opportunities.
The tradeoff, of course, is risk. Smaller companies often have fewer revenue streams, thinner margins, less financial cushion and less access to capital than large-cap stocks. A bad quarter, a lost customer, or a macroeconomic headwind won't necessarily cripple, say, a Dow Jones Industrial Average component, but it could very well sink some of the companies in the Russell 2000.
That tends to lead to more volatile stock movement — there's potential for sharp upside, sure, but also the potential for a stock to get kneecapped.
Other factors to keep in mind:
- Small caps may be thinly traded, resulting in wide bid-ask spreads .
- Institutional investors might struggle to build or exit positions without moving the market.
- Also, small caps tend to be more domestically focused compared to large caps. This is great when the U.S. economy is humming. But small caps feel the pinch of a slowdown more acutely than large multinationals that derive revenues from here and abroad.
One last consideration is that the relationship between large- and small-cap stocks tends to ebb and flow over time. Earlier this year, Fidelity Investments (PDF) studied the performance of both segments between 1929 and 2025. It found there were "six periods of relative outperformance for U.S. small caps since 1929 and seven periods of underperformance. These performance cycles have averaged about seven years." (Emphasis mine.)
How to find the best small-cap stocks to buy
As I usually say, I can't predict exactly what you might want out of small-cap stocks, but I can help you start your search with a basic quality screen.
In this case, I'm going to focus on the small-cap segment's strength: growth. To get the following list of the best small-cap stocks to buy, we've looked for firms that …
Are within the S&P 600. Again, these are 600 stocks that were between $1.2 billion and $8 billion at inclusion. (Only one stock on our current best-of list fell outside this range.)
Are expected to grow revenue by at least 20% annually in the next two years. Top-line growth is often the primary concern of smaller companies, especially newer issues that haven't yet reached profitability. This is just a baseline — feel free to adjust your limit higher if you're looking for screaming growth.
Are expected to grow earnings by at least 15% annually over the long term. Many high-growth small caps aren't yet profitable, so if you screen for a percentage growth rate, companies with currently negative earnings simply won't show up. Thus, if you want to find truly explosive small caps, you might want to ignore this criterion. I'm including this criterion with the understanding that my list will likely skew toward larger, more established small caps.
Have at least five covering analysts. We'd like to look at stocks that are on Wall Street analysts' radar, which makes it likelier that there's both more reporting and more insights on these companies. The more research we have at our disposal, the more educated a decision we can make. When screening for larger companies, I typically set the baseline at 10 analysts. But small-cap coverage is usually thinner, so five analysts is a reasonable starting point.
Have a consensus Buy rating. All of the stocks must have an average broker recommendation of 2.5 or less within S&P Global Market Intelligence's ratings scale. S&P Global Market Intelligence converts analysts' ratings into a numerical scale. Anything with a score of 2.5 or less is considered a Buy. Every stock that made the list has a score of 2.0 or less, which means these are higher-conviction Buys and, in some cases, Strong Buys — the best designation.
Ticker |
Company |
Market Cap |
Sector |
Long-term EPS growth rate |
Estimated annual revenue growth (2 years) |
Analysts' consensus recommendation |
HNI |
HNI Corp. |
$2.4 billion |
Industrials |
20.0% |
48.2% |
1.00 |
TGTX |
TG Therapeutics |
$8.4 billion |
Health Care |
15.1% |
41.8% |
1.67 |
VSEC |
VSE Corporation |
$6.0 billion |
Industrials |
20.8% |
39.2% |
1.11 |
DCH |
Dauch Corporation |
$1.5 billion |
Consumer Discretionary |
30.7% |
37.6% |
2.09 |
KRYS |
Krystal Biotech |
$10.0 billion |
Health Care |
63.0% |
32.0% |
1.18 |
MXL |
MaxLinear |
$7.8 billion |
Information Technology |
88.5% |
30.1% |
1.82 |
SEZL |
Sezzle |
$5.0 billion |
Financials |
265.0% |
28.9% |
1.67 |
ALGT |
Allegiant Travel |
$1.9 billion |
Industrials |
63.5% |
28.5% |
2.18 |
ICHR |
Ichor Holdings |
$3.2 billion |
Information Technology |
70.0% |
23.3% |
1.43 |
DAN |
Dana Inc. |
$3.2 billion |
Consumer Discretionary |
25.0% |
23.0% |
2.00 |
UCTT |
Ultra Clean Holdings |
$4.9 billion |
Information Technology |
35.0% |
21.9% |
1.20 |
* This is a fun fluke. For decades, the Russell 2000 operated on an annual reconstitution schedule, and the last time the index reconstituted was June 30, 2025, based on market caps as of April 30, 2025. Bloom Energy was worth about $4.3 billion then. In the 13 months and change since that April data date, Bloom Energy's market cap has rocketed by nearly 2,000%. For what it's worth, FTSE has since announced that the Russell indices will return to semiannual reconstitutions in 2026 — the regular annual adjustment in June, then the first semiannual reconstitution in December.
