Small-cap stocks can be an investor’s best friend in terms of amplifying returns without taking on excessive risk. I like looking at companies with $1-$2 billion market capitalizations. That’s because this group provides ample room for growth, and you’re less likely to find companies that are preparing to go bankrupt. Of course, balancing these small cap stocks with some blue chips is key for managing risk. But with over 1,400 publicly traded small cap options, how do we even begin our search for the diamonds in the rough?

That’s where AI comes in handy. New data-sifting tools like Google’s (NASDAQ:GOOG, NASDAQ:GOOGL) Gemini can analyze oceans of data to spot promising trends and valuation gaps. I’m not saying AI is a crystal ball. Indeed, the heavy lifting in terms of research is still up to us humans. But letting smart machines point us toward some ideas, that’s a process that can give individual investors an edge.

I asked Gemini to spill the beans on a few small caps that look poised to outperform. Of course, you should dig into these companies’ financials yourself before buying anything. But having a helping hand can definitely speed up uncovering market-beating ideas!

Openlane (KAR)

Openlane (NYSE:KAR) is a technology company focused on running digital marketplaces for used vehicles. That’s a sensible niche I believe is ripe for growth. With its stock hovering around $14 per share (roughly flat for years now despite its financials rebounding), Openlane caught my eye.

Drilling into the details, Openlane does seem poised to deliver on its prospect. The company’s forward price-earnings ratio sits at 20-times, which is quite reasonable given Openlane’s expected earnings per share growth of 57% in 2023 and ongoing double-digit growth predicted afterward. And trading at just 1-times sales despite healthy revenue expansion, Openlane has room to run. The company recently topped Q3 estimates, too – beating consensus earnings per share projections by 21% and revenue by 1.4%.

I think Openlane can ride several tailwinds higher. As the economy normalizes post-pandemic, this small-cap stock should see continued recovery. With relatively high interest rates despite recent Federal Reserve cuts, used car demand seems strong. Considering the average U.S. passenger vehicle is now 13.6 years old, that demand feels sustainable. Openlane’s digital used car marketplaces could thrive as more consumers seek affordable transportation options.

Traeger (COOK)

Gemini’s next small-cap suggestion is Traeger (NYSE:ZUMZ). This well-known maker of popular wood pellet grills also doubles as an Internet of Things (IoT) play. I must admit, I like the ingenuity of a grill you can control and monitor from your phone!

Unfortunately, 2022 was unkind to Traeger, as revenue fell 16.5% to $655 million amidst broader economic struggles. Losses ballooned as well, reaching $382 million for the year.

However, signs suggest a comeback could be brewing. Traeger nearly halved losses in its most recent quarter compared to 2021, shaving this number to $19.8 million. Revenue also grew 26% year-over-year. With the company’s stock price still depressed, I wonder if the market is overlooking this momentum shift.

Analyst estimates bolster the bull case further. Traeger is expected to return to profitability in 2024, with earnings per share then estimated to quintuple in 2025. The company’s valuation looks compelling, too. At 14-times 2025’s predicted earnings per share, I think investors are picking up a steal with this name. Another bullish factor to consider is Traeger’s debt load of $434 million. With the Fed signaling further rate cuts ahead, financing costs should ease and provide greater financial flexibility for the grill maker.

As American consumer behavior normalizes post-pandemic, Traeger’s growth trajectory can reignite after its temporary setback. This grilling gear company seems poised to provide sizzling returns.

Zumiez (ZUMZ)

Zumiez (NASDAQ:ZUMZ) is another small-cap stock Gemini who thinks it is mis-priced. This specialty retailer selling zoomer-oriented apparel and gear has faced pandemic pressure. The company’s fiscal 2023 revenue declined 19% to about $1 billion. But with the stock sitting 65% below its 2021 peak, I think the negativity is overblown.

Financial struggles could persist for Zumiez in the near-term. But analysts expect a rebound is coming. They forecast the company will return to positive revenue growth next quarter, which ends in April 2024. The company’s earnings per share are also predicted to climb back into positive territory around the same timeline.

Zumiez’s valuation also seems to be skewed favorably for investors. Even during COVID-induced volatility, Zumiez shares never traded below $14 per share. But now the stock is changing hands below the $18 level, presenting a compelling entry point. Zumiez may have hit a rocky patch, but its long-term growth prospects remain exciting.

On the date of publication, Omor Ibne Ehsan did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.