Small-cap stocks are typically defined as those businesses with market capitalizations between $300 million and $2 billion. This asset class has long been a favorite among investors seeking outsized returns. This is because these companies often possess robust growth potential. Yet, over the past year, many investors have gravitated towards mega-cap stocks. This was partly due to high inflation and concerns over a potential recession. As a result, in the past 12 months, the S&P 500 index returned around 33%. In contrast, the S&P 600 Small-Cap index gained 15%.

However, small-cap stocks have historically outperformed their larger counterparts over extended periods, despite their inherent volatility. As the end of the first quarter of 2024 approaches, the economic landscape appears to be shifting in favor of small-cap stocks. Better-than-expected economic data and the possibility of three interest rate decreases by the Federeal Reserve could lead to a rotation towards small-cap stocks. This article now delves into small-cap stocks poised to provide portfolio diversification along with potential long-term returns.

Blue Bird Corporation (BLBD)

The first name among our small cap stocks is the Georgia-based Blue Bird Corporation (NASDAQ:BLBD). The company provides electric and low-emission school buses, selling products through a network of dealers and directly to private fleet operators and governments. 

Despite stagnant demand in the electric vehicle (“EV”) space overall, the bus manufacturer announced robust fiscal 2024 first-quarter results. Blue Bird grew revenue by 35% YoY to $318 million, driven by strong growth in the “Bus” segment. Net income came in at $26.2 million, up $37.4 million over the past year. 

Strong market demand for Blue Bird’s zero-emission EV buses has led to robust profit margins, record EV production, solid backlog, and increased guidance. The vehicle manufacturer boasts 42% revenue growth in 2023, as well as around 4,600 units in its order backlog.

Analysts note that the EPA’s Clean School Bus Program was a key growth engine, which awarded companies almost $1 billion in funding from the Phase 1 of its $5 billion program in 2023. New EV orders in 2024 from the Phase 2 is expected to provide around $1.5 billion in grant and rebate funding for electric school buses as well.

BLBD stock is up 18% year-to-date (YTD). Shares are trading at 15.7 times forward earnings and 0.8 times trailing sales. The 12-month median price forecast by anlaysts for Blue Bird stock stands at $36.50 suggesting a potential return of 5%.

GigaCloud Technology (GCT)

Next on our list of small cap stocks is GigaCloud Technology (NASDAQ:GCT). The company operates a global business-to-business (B-2-B) marketplace that connects buyers and sellers for big and bulky products. Its platform offers a wide range of services from finding products to making payments and handling shipping, earning a percentage commission based on value of transaction. 

Fourth quarter 2023 metrics included highest quarterly revenue in the company history, which led to a 23% jump in GCT stock price. Revenue increased 95% YoY to $245 million, which highlighted “an inflection point in the size and scale of GigaCloud,” according to GigaCloud CEO Larry Wu. Earnings per share (“EPS”) surged to 87 cents, up from 31 cents in the previous year.

Manufacturers in Asia are increasingly using GigaCloud’s platform to sell their products around the globe. Meanwhile, strategic acquisitions like Noble House have enhanced GigaCloud’s position as a global marketplace for large products. Noble House is helping management expand its product categories as well as warehousing and fulfillment capabilities. Gross merchandise volume increased 53% YoY to $794 million in 2023, driven by a 27% jump in spend per active buyer. 

GCT stock is up 136% YTD. Shares are changing hands at 17.9 times forward earnings and 3.0 times trailing sales. Meanwhile, the 12-month median price forecast for GCT stock stands at $29.00.

The Vanguard Small-Cap Growth ETF (VBK)

The final name on our small cap stocks list is the Vanguard Small-Cap Growth Index Fund ETF Shares (NYSEARCA:VBK). This exchange-traded-fund provides exposure to a range of small-cap growth companies. VBK has 637 holdings, while the 10 largest holdings account for around 9% of net assets, which stand at $34.4 billion.

Among those top names are Super Micro Computer (NASDAQ:SMCI), Vertiv Holdings (NASDAQ:VRT), Deckers Outdoor (NYSE:DECK), Targa Resources (NASDAQ:TRGP), and Axon Enterprise (NASDAQ:AXON).

The fund has a high allocation towards technology, industrials, healthcare and consumer discretionary, followed by energy, financials, and real estate. A number of tech and healthcare companies in the ETF have the potential to become takeover candidates, which could add significant shareholder value.

Year-to-date, VBK is up around 4%. Its trailing price-to-earnings (P/E) and price-to-book (P/B) ratios stand at 29.0x and 4.1x, respectively. Given the increased uncertainty in the market, short-term profit-taking may be likely in the coming weeks. A drop toward $250 would improve the margin of safety for long-term investors. Finally we should remind investors that VBK is a relatively low-cost ETF with an annual expense ratio of 0.07%.

On the date of publication, Tezcan Gecgil did not have (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