Monthly gains of nearly 70%, 100%, and even nearing 200% occur on a regular basis in this market segment. I’m not talking about options, futures, or risky foreign stocks of any kind. The gains are homegrown right here in the United States and can be had for under $5 per share.
These stocks, which typically represent new, growing companies, are in the small-cap sector.
And I’ve found three stocks under $5 that are set up to be great buy opportunities.
How Small-Cap Stocks Produce Outsized Gains
The definition of a small-cap stock is not set in stone — it depends who you ask. But according to the most commonly accepted definition, small-caps are any public company with a market capitalization of $500 million to $2.5 billion.
I know this sounds like big money, but in the world of public enterprises, it is indeed minuscule. To put things in perspective, microcaps are any stocks with a sub-$500 million valuation, and midcaps are widely considered to have a capitalization greater than $2.5 billion but less than $10 billion. Anything over $10 billion places the firm in the large-cap space.
Over time, the small-cap sector outperforms the overall stock market. However, this tried and true maxim is not accurate this year. The small-cap Russell 2000 index has lagged both the Dow Jones Industrial Average and the broad market S&P 500 indexes.
This underperformance spells opportunity in the small cap sector.
The iShares Russell 2000 ETF (NYSEARCA:IWM) posted 24% gains over the last 52 weeks, but has only picked up 3.5% so far in 2017. At the same time, the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) returned 18% gains year-over-year and a little less than 6% in 2017 and the SPDR S&P 500 ETF (NYSE:SPY) has soared nearly 7% in 2017 and close to 15% over the last 52 weeks.
The reason for this performance disconnect is not due to any problem in the small cap sector. In fact, outlooks are quite bullish for small-cap stocks. The difference this year has to do with the outperformance of the large-cap sector. The White House’s policy intentions of repatriation, infrastructure improvement and tax reform directly favor larger companies.
In other words, the large-caps have been supercharged thanks to the pending policy changes that are expected to send trillions of dollars into the economy.
While I fully expect small-caps to catch up to their larger cousins soon, individual stocks can outperform regardless of what happens to the overall sector.
Here then, are the 3 best sub-$5 stocks to buy now: