Investors who can stomach more risk stand to reap greater rewards. Thatâ€™s where small-cap growth stocks come in, and they just might deserve a place in your buy-and-hold portfolio.
Research shows that growth stocks with small market capitalizations â€“ market values between roughly $300 million and $3 billion â€“ tend to outperform larger asset classes over time. Indeed, the so-called small firm effect was documented by Eugene Fama, a winner of the 2013 Nobel Prize in Economics.
â€śBecause they usually are young and lack exposure, small-cap growth companies tend to fly under the radar,â€ť writes financial services company Federated Investors. â€śThey are less closely followed and understood by the community of securities analysts, which sometimes means they sell for less than their true or potential value, creating opportunities if the market comes to re-price their shares accordingly.â€ť
To get a sense of which small-cap growth stocks look ripe for the picking these days, we screened the small-cap benchmark S&P 600 Growth Index for stocks with the highest average analyst ratings. We limited ourselves to companies with market caps of at least $1 billion. Furthermore, our stocks had to have a minimum of five â€śStrong Buyâ€ť analyst recommendations.
S&P Global Market Intelligence surveys analystsâ€™ ratings on stocks and scores them on a five-point scale, where 1.0 equals a â€śStrong Buyâ€ť and 5.0 means a â€śStrong Sell.â€ť Any score lower than 3.0 means that analysts, on average, rate the stock as being buy-worthy. The closer the score gets to 1.0, the better.
Based on those criteria, hereâ€™s a look at the 10 best-rated small-cap growth stocks in the S&P 600 Growth Index.
Data is as of May 15. Analystsâ€™ ratings, provided by S&P Global Market Intelligence, are as of May 7. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Companies are listed by strength of analystsâ€™ recommendations, where the last company holds the best rating.