Small-cap stocks are a great idea for investors looking to maximize growth by buying into younger companies that have yet to strike it big. Such investments may carry some extra risks and aren’t for every investor. But if you have the proper risk tolerance, these small-cap stocks could become big winners.

Small-cap stocks represent companies with a market capitalization below $2 billion. Younger companies are often small-cap stocks with room for rapid expansion and innovation. These companies tend to be more agile than bigger companies and can react quicker to changing market conditions than a company than a major conglomerate.

But a word of warning: small caps don’t get the same kind of coverage from analysts or the media as their large-cap brethren. While that allows savvy investors to grab a gem before the public, it also poses more risks for investors who guess wrong.

Today, we’re using the Portfolio Grader to tip the scales in our favor. The Portfolio Grader evaluates stocks based on earnings performance, growth, momentum, analyst sentiment, dividend history and other factors. The best stocks get coveted “A” grades, while the worst flunk out with an “F.”

If you want to diversify your portfolio by finding a small-cap stock or two, this list is for you.

SoundHound AI (SOUN)

SoundHound AI (NASDAQ;SOUN) operates a platform for voice-enabled solutions and technologies powered by artificial intelligence. SoundHound uses AI to understand human voice commands and questions. The technology can be used for voice assistance and voice search capabilities, making this one of the small-cap stocks with big potential.

The company’s AI platform can also recognize songs hummed or sung by a user, allowing it to develop the first voice-activated music app.

Revenue in the second quarter was $8.75 million, up 42% from a year ago. The growing company posted a loss of $16.43 million, but that was 43% better than the $28.9 million loss in 2022.

SoundHound reported gross margins of 79% compared to 60% a year ago. That helped the company improve its balance sheet, giving it $130 million in cash at the end of the second quarter.

SOUN stock is volatile and after an up-and-down year shows a 2% gain in 2023. But I think it’s poised for greater things. I’m not surprised at all it has an “A” grade for growth and a “B” grade overall in the Portfolio Grader.

Nerdy (NRDY)

Nerdy (NYSE:NRDY) is an educational technology company that combines online learning with artificial intelligence to help people learn.

The company currently offers classes in more than 3,000 subjects in various formats, including one-on-one classes, large group or small group classes, and self-study programs.

It uses AI to identify the best expert teachers for its users and connects them based on more than 100 attributes and hundreds of thousands of data points.

Growth is speeding up in 2023. The company reported third-quarter revenue of $40.3 million which was up 27% from a year ago. It also topped the company’s guidance for revenue between $38 million and $40 million. Gross profit of $29.2 million was up 33% from a year ago.

In the fourth quarter, the company forecasts revenue of $54 million to $56 million, a 32% increase from the fourth quarter of 2022.

With that growth, Nerdy won’t be a small-cap stock for long. NRDY stock is up 37% this year, and it gets “B” ratings for both growth and overall in the Portfolio Grader.

B. Riley Financial (RILY)

B. Riley Financial (NASDAQ:RILY) is a California-based financial services company with various services.

On the one hand, the company works with corporate clients for services such as mergers and acquisitions, debt and equity capital, and restructuring. But then it also is in the auction and liquidation business, helping distressed companies sell assets and inventory.

Such recent activity included the liquidation of inventory from Z Gallerie retail stores, whose parent company, DirectBuy Home Improvement, is in Chapter 11 bankruptcy;

Earnings in the third quarter announced Nov. 8 were a new record for the company, reaching $462.3 million. That’s an increase of 48% from a year ago. The company says it has $250 million of cash and cash equivalents on hand and total cash and investments of $2.05 billion. It also declared a dividend of $1 per share.

RILY stock has an “A” grade for growth and a “B” overall in the Portfolio Grader.

Borr Drilling (BORR)

Borr Drilling (NYSE:BORR) is more than a top-rated small-cap stock. I think it’s also one of the best oil and gas stocks you can buy in this competitive market.

Borr is a Bermuda-based company that operates as an international drilling contractor. It works with oil and gas companies around the world, and its rigs can operate in water as deep as 400 feet and can bore down 35,000 feet underground.

The company is in a rapid growth mode, with second-quarter revenue up 78% from a year ago to $187.5 million. And the profits are expected to continue, as Borr has a contract backlog of $1.65 billion.

That’s a lot of money. BORR stock has an “A” grade for growth and a “B” overall in the Portfolio Grader.

ACM Research (ACMR)

ACM Research (NASDAQ:AMCR) makes equipment for the semiconductor industry, such as processes for wafer cleaning, polishing and inspection. It’s a much-needed industry today.

ACM, which was founded in California but also has a subsidiary in China, is seeing solid growth in 2023. Revenue in the third quarter was $168.5 million, up 26% from a year ago. Earnings of 43 cents per share were better than the 35-cent EPS the company recorded in the same quarter a year ago.

The demand for semiconductors will continue to grow, and ACM’s strategic position in both the U.S. and China allows it to grow despite any trade barriers enacted by Beijing or Washington.

ACMR stock is up 104% this year, and it gets “A” ratings both for growth and overall in the Portfolio Grader.

Gaotu Techedu (GOTU)

Another virtual learning platform makes our list with Gaotu Techedu (NYSE:GOTU) an online tutoring platform in China. The company’s platform serves students from kindergarten through grade 12.

With live classes, on-demand content and interactive tools, Gaotu Techedu has been essential to keep students learning even during China’s lengthy shutdown because of the Covid-19 pandemic.

But notably, the company’s revenue continues to increase even as China reopens. Revenue in the second quarter was 703.1 million Chinese yuan ($96.5 million), up 30.7% from a year ago. Income also increased 171.6% from a year ago.

When Gaotu reports earnings again later this month, it will be aiming for its fourth consecutive quarter of profitability. I think chances are good it will hit the mark.

GOTU stock is up 4.6% this year, but it gets a “B” rating for growth and an “A” overall rating in the Portfolio Grader.

Immunity Bio (IBRX)

Immunity Bio (NASDAQ:IBRX) is a clinical-stage biotechnology company. It’s working on making therapies and vaccines that bolster the natural immune system to treat cancer and infectious diseases.

The company is currently undertaking Phase 3 trials for treatments for bladder cancer and lung cancer and has Phase 2 trials for treatments for pancreatic cancer and Lynch syndrome. There are also several Phase 1 trials in progress.

In a setback, the Food & Drug Administration rejected ImmunityBio’s application for its Anktiva treatment for bladder cancer, citing issues at its partners’ factories. But IBRX resubmitted the application, and the FDA plans to respond by April 23, 2024.

Biotech companies are not for every investor because of the long regulatory approval process. But when a company hits, it can be very profitable. IRBX stock has “B” ratings for growth and overall in the Portfolio Grader.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.