There are many advantages to investing in small-cap stocks. These companies are typically more established than the companies within the microcap stocks category (stocks with a market cap of $300 million or less). At the same, they are still “tiny” enough to have stronger growth potential than larger, slower-growing mid and large-cap names. This makes small-caps a great area to explore, if you are an investor seeking out stocks with strong upside potential.
According to Finviz, there are around 1,645 small-caps trading on major U.S. exchanges. But among the scores upon scores of names within small-cap territory, there are a few names that stand out as strong buys.
Reasonably-priced, with catalysts in place to drive big gains, if you are thinking about “going small to go big,” these are the top seven small-cap stocks to take a closer look at.
Arcos Dorados (ARCO)
Among small-caps, ARCO stock has performed strongly this year. Investors have clearly caught onto the fact that this restaurant stock was undervalued. However, even after gaining by around 23.39% year-to-date, the potential for a further re-rating for shares remains.
The stock is currently trading for around 12.7 times forward earnings and is expecting to grow earnings at a double-digit clip both next year and in 2025. That in combination with a possible move toward a higher forward multiple of up to 20 times may result in now being the time to buy.
Build-A-Bear Workshop (BBW)
Build-A-Bear Workshop (NYSE:BBW) spiked higher in late 2022, and so far in 2023,the specialty retailer’s shares have kept climbing, rising by around 12.41% since January. While not for certain, the stock’s dwindling short interest may be a big reason for this.
At one point, BBW stock was heavily shorted. Traders were betting that the economic slowdown would severely affect Build-A-Bear’s performance. Yet, as operating results have continued to come in strongly, short interest has fallen from more than 20% of outstanding float earlier this year, to around 13.3% of float today.
Still, even as BBW’s “squeeze appeal” has faded, more upside may be on the table for this small-cap stock. Shares are still very cheap, at 7.4 times forward earnings. According to DA Davidson analyst Michael Baker, the market is still underappreciating the retailer’s popularity among teens and adults.
Geo Group (GEO)
While it’s a controversial stock pick, Geo Group (NYSE:GEO) is undeniably one of the best small-cap stocks. Shares in the company hit a multi-decade low in 2021, following the Biden administration’s move to phase out the Federal use of private prisons.
However, while a setback, that decision wasn’t game over for GEO stock. The company has worked to adapt to the change in the private prison industry, paring down debt and shifting towards areas in which it can still operate, like immigration detention centers.
Back in September, Citron Research argued that the current migrant crisis is a potential boom for the company. Shares have rallied since Citron’s comments, but it may not be too late to buy. GEO trades for less than 10 times earnings. As Geo Group improves its balance sheet, and its non-Federal prison management businesses thrive, this stock’s comeback could continue.
Hudson Technologies (HDSN)
Up by more than 71% over the past year, Hudson Technologies (NASDAQ:HDSN) has been one of the top small-cap stocks, in terms of share price performance. Over a multi-year time frame, shares in this refrigerant services company have really been on a tear.
Over the past five years, HDSN stock is up by more than 1,500%. While it’s easy to worry about shares plateauing after an incredibly strong run, this may not necessarily happen. Why? Hudson continues to have strong long-term growth potential due to regulatory changes spurring high demand for reclaimed refrigerants.
As high growth continues, it is highly-likely that HDSN, trading at an earnings multiple that implies low-growth (11.4 times earnings), will continue to benefit from an expansion of its earnings multiple. Further turbocharged gains may lie ahead.
Back in September, I named Hibbett (NASDAQ:HIBB) one of the best retail stocks to buy due to its heavily-discounted valuation, which suggested macro uncertainties were already heavily baked into its stock price.
I continue to hold the same view about HIBB stock. The short-side continues to wager that underwhelming fiscal results will knock Hibbett even lower. That’s why short interest remains at an elevated 15.2% of float. Still, as a Seeking Alpha commentator recently pointed out, Hibbett has one major competitive advantage.
That would be Hibbett’s choice to stick to geographic markets underserved by larger sporting goods retailers, which may help it ride out today’s slowdown. As results normalize, and the omnichannel retailer keeps growing its physical store and e-commerce presence, HIBB could soar, especially if improved results cause the short side to start unwinding its bearish positions.
Bank of Butterfield (NTB)
I’ve previously discussed Bermuda-based Bank of Butterfield’s (NYSE:NTB) appeal as a high-yield stock. This offshore financial institution’s shares remain attractive in large part to NTB’s high forward dividend yield (6.56%), and the potential for strong gains is just another reason to add it to your portfolio.
Admittedly, NTB stock is not cheap on a price-to-book basis. Instead of being able to buy in at a discount to book, Bank of Butterfield trades at a 39% premium to its book value. However, in terms of price-to-earnings, NTB is very cheap, with a forward earnings multiple of 5.7.
This valuation makes it one of the cheapest of the diversified banks, most of which currently sport earnings multiples in the high single-digit/low double-digit range. It may require the situation with interest rates to normalize, but Butterfield may be poised to make a big recovery.
Ring Energy (REI)
If you’re bullish on energy prices continuing to climb, Ring Energy (NYSEMKT:REI) is definitely one of the small-cap stocks to consider. This independent oil and gas company trades for just 3.4 times forward earnings, mainly because of Ring Energy’s heavily leveraged balance sheet.
However, REI’s management has been working to de-lever. Given the latest spike in crude oil and natural gas prices, and the potential for said prices to keep climbing due to recent geopolitical events, Ring appears well-positioned to generate the level of cash flow needed to reduce debt, and to keep making acquisitions of oil and gas assets located in the Permian basin.
Speaking of which, Ring’s Permian focus may bode well for REI stock investors. Following ExxonMobil’s (NYSE:XOM) recently-announced deal for Pioneer Natural Resources (NYSE:PXD), larger oil companies may be on prowl for other producers with Permian assets, like Ring.
On the date of publication, Thomas Niel held GEO. He did not hold (either directly or indirectly) any positions in any of the other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.