Small-cap stocks tend to outperform their larger brethren over time. Coming out of the pandemic, the Russell 2000 small-cap index was handily beating the barometer of the 500 largest stocks on the market.

However, after government spending caused inflation to rise to its highest levels in 40 years, the Federal Reserve enacted an unprecedented series of 11 hikes in interest rates. Between March 2022 and July 2023, the Fed Funds rate rose from 0% to between 5.25% and 5.50%, where it stands today.

The effect was devastating on small-cap stocks. Because small companies don’t have the same financial resources as their large-cap stocks, their borrowing costs soar, causing a hit to their bottom line. It took a toll on businesses. The Russell 2000 went from matching the performance of the S&P 500 throughout 2022 to falling behind beginning in March 2023. 

Over the past 15 months, the broad market index returned more than 25% compared to just 7.4% for their smaller cousins. This year the Russell 2000 is basically at break-even, while the S&P 500 is up 15%.

But the following seven Russell 2000 stocks to buy now hold the promise of not only outperforming their index but also their bigger siblings.

Paysafe (PSFE)

Payments processor for the entertainment industry Paysafe (NYSE:PSFE) is the first small-cap stock to buy. Almost a year ago I highlighted it as a company to consider for a breakout performance.

Although the payments space is crowded with larger, better-financed peers like PayPal Holdings (NASDAQ:PYPL) and Block (NYSE:SQ). Paysafe reorganized its business and zeroed in on a niche market. It primarily targets online sports, casino games, poker and video gaming, as well as the hospitality industry and cryptocurrencies.

I noted Paysafe’s business was gaining traction and its stock is up 43% since then. Its shares trade under $18, up 38% this year alone. And PSFE stock is still a bargain. Wall Street forecasted earnings to grow 163.8% next year, and shares go for just 17x forward p/e earnings. It also trades at a fraction of its sales and an incredible 3x the free cash flow (FCF) it produces.

Analysts have a $25.02 per share one-year price target on the stock, implying 43% more upside, and Paysafe stock may not stop there.

QXO (QXO)

Bradley Jacobs has the golden touch. He might not be a household name, but he is brilliantly successful as a serial kingmaker. Jacobs took United Rentals (NYSE:URI) from a small equipment rental company to the national stage by buying up smaller rental shops. He did the same thing with United Waste Systems until he sold it to trash-hauling giant Waste Management (NYSE:WM) for $2.5 billion.

Jacobs also turned Express-1 Expedited Solutions into the massive logistics powerhouse known as XPO Logistics (NYSE:XPO). He subsequently spun off both RXO (NYSE:RXO) and GXO Logistics (NYSE:GXO) from XPO, respectively, turning them into some of the largest trucking and logistics businesses in their own right. Now he is doing it again.

Jacobs recently invested $1 billion in SilverSun Technologies and rebranded it as QXO (NYSE:QXO). I’m sensing a pattern here. He is breaking into the $800 billion building products distribution market and will use his proven strategy of rolling up the industry under QXO’s umbrella. Jacobs said he expects “to achieve a revenue run-rate of at least $1 billion by the end of year one, at least $5 billion within three years, and tens of billions of dollars over the next decade.” 

As everything Jacobs touches turns to gold, I expect he will be wildly successful with QXO. What happens when he runs out of letters to tack onto his companies, however, remains to be seen.

Rackspace Technology (RXT)

Cloud computing platform Rackspace Technology (NASDAQ:RXT) is benefiting from the rush by businesses to put their data in the cloud. It is also enhanced by the rise of artificial intelligence (AI), giving its hybrid and multi-cloud platform greater resonance with customers.

Almost exactly one year ago, it launched a new AI unit called Foundry for Generative AI by Rackspace (FAIR). Its purpose was to provide a comprehensive set of generative AI solutions across multiple cloud computing platforms. It then partnered with Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) to give Rackspace customers access to Google Cloud’s portfolio of generative AI tools.

Rackspace Technology is a company in transition as it stumbled when competing against the likes of Google, Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) as cloud services grew. It considered going private in 2022 but couldn’t find a buyer. It ultimately reorganized itself into a services-led sales business and is now gaining traction.

Although sales were down year-over-year (YOY), it handily beat estimates, and the stock is marching higher. Shares are up 26% this year and have more than doubled from their 52-week low. Rackspace Technology is proving it has more growth in the cards.

Tutor Perini (TPC)

Tutor Perini (NYSE:TPC) is the third-largest construction and engineering firm in the country behind its two better-known peers Jacobs Solutions (NYSE:J) and AECOM (NYSE:ACM). Yet, at a market cap of just $1.1 billion, it is one-tenth the size. It generated $3.9 billion in revenue last year or about one-tenth of what Jacobs produces in one quarter.

Business is booming, though. Revenue surged 35% in the first quarter to $1.05 billion, and its backlog of projects grew to $10 billion, up 26% year over year. It forecasts equally strong backlog growth for the full year and all of 2025.

Spurred, in part, by the Infrastructure Investment and Jobs Act, Tutor Perini has been winning contracts for complex megaprojects that other contractors can’t handle and don’t bid on. That allows it to demand partial payment of the contracts upfront, forcing the client to finance the cost of labor and materials from Day 1. It helped the construction and engineering firm post a $15.8 million profit in the first quarter compared to a $49 million loss a year ago.

Tutor Perini stock is up 136% so far this year and has tripled over the last 12 months. Despite the gains, with such a backlog of projects in the pipeline, TPC stock can build on its gains and grow even more.

Rocky Brands (RCKY)

Footwear manufacturer Rocky Brands (NASDAQ:RCKY) owns well-known shoe and boot brands, including its namesake banner Rocky, Georgia Boot, Durango and the Original Muck Boot Company. It is another stock trying to make a turnaround, and there are signs it may be successful.

Rocky reported first-quarter earnings in May that showed a 2.2% rise in sales to $113 million on a GAAP basis. On an adjusted basis, though, excluding the Servus brand it divested in March 2023, revenues jumped 7.6%. Even better, operating profits surged 90% YOY to $8 million. That led to net profits of $2.6 million or 34 cents per share. It was a big reversal from the losses recorded in the year-ago period.

The footwear maker spent most of 2023 shoring up its financials by reducing inventories and paying down debt. Rocky Brands is now in a much better position than last year or even at the start of 2024. The market is starting to catch on to its resurgence, and shares are up 26% this year. Rocky Brands stock is 81% over the last 12 months and has more than tripled from its 52-week low.

Now that it has greater freedom of movement, expect Rocky Brands to take it to the next level.

Consol Energy (CEIX)

Few industries have been as vilified as coal, and politicians have been promising to bankrupt producers for years. Over the past decade, the number of coal-fired power plants was cut in half. The Energy Information Administration says 557 coal plants were operating in 2012 but fell to 242 in 2022, the last year data is available.

Despite coal being a cheap and plentiful source of energy, policies prefer so-called cleaner forms, primarily natural gas. That has weighed on coal producers like Consol Energy (NYSE:CEIX), which operates the largest underground coal mine in the United States. Consol’s Pennsylvania Mining Complex is really a series of three underground mines.

Consol also operates a marine terminal in the Port of Baltimore. The port was recently in the news because of a cargo ship that rammed the bridge spanning the waterway, causing it to collapse and block ocean-going traffic.

That was hard for Consol because its coal shipments bound for international markets ship from there. But the waterway was reopened in May, and Consol began moving coal once again.

Although Consol stock is down 5% year-to-date, shares are up 55% from their 12-month lows and will be steaming higher still.

Immersion (IMMR)

Before the arrival of artificial intelligence, one of the premier technologies people considered was haptics, or the ability to use touch to provide sensory feedback to technology users. The digital keyboard on your smartphone, for example, is possible because of haptics, as are the vibrations it emits when someone calls. Immersion (NASDAQ:IMMR) is one of the leading providers of haptics technology that it licenses to some of the biggest names in tech today.

Most recently, Immersion renewed its license agreement with Samsung for its devices. Previously it did so with Nintendo (OTCMKTS:NTDOY) and Meta Platforms (NASDAQ:META) for use in their respective gaming systems, hardware, software and virtual reality products. Because haptics is so ubiquitous and commonplace, we hardly even consider it anymore. One day, AI will likely be the same.

Immersion’s first-quarter revenue soared to almost $44 million from $7 million last year. While not even the company expects that kind of performance to repeat, chairman and CEO Eric Singer says, “Immersion is operating from a position of strength as we work to protect and monetize our intellectual property.” 

Profits also more than doubled during the quarter to 59 cents per share from 25 cents. Immersion made its seventh quarterly dividend payment of 4.5 cents. Shares are up 54% in 2024, but almost all of the gains came since May 1. Trading just under $11 a share, Immersion stock is an affordable entry into this newly strengthened tech player.

On the date of publication, Rich Duprey 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.