Small Cap Stocks Outlook 2023

The bear market of 2022-23 has not been kind to small cap equities, with the Russell 2000 declining over 30%. While the stock market has since rebounded it has been very narrow with only a select few mega cap stocks leading the pack.

However, small caps are poised to benefit into 2024. Find out why.

What are small cap stocks?

Imagine a bustling marketplace with various vendors, each selling their unique products. In the financial market, these vendors are akin to publicly traded companies, and their products are their stocks. Small cap stocks are like the charming little stalls tucked away in the corners, offering potential hidden gems.

Specifically, 'small cap' refers to companies with a market capitalization (the total market value of all their publicly traded shares) of between $300 million and $2 billion. It's quite a range, but compared to the behemoths of the corporate world, these are indeed the smaller players.

Small cap stocks, like those quaint marketplace stalls, can offer exciting opportunities for investors. They often present higher growth potential than larger, more established companies. However, with greater potential comes greater risk, and these stocks can also be more volatile.

Why invest in small cap stocks?

Stepping into the world of small cap stocks can feel a bit like Alice falling down the rabbit hole. But don't be fooled by their size! These under-the-radar investments pack a punch and offer a wealth of opportunities for savvy investors.

High potential for growth is one of the primary reasons to invest in small cap stocks. Unlike their larger counterparts, these companies often have more room to expand and innovate, which can lead to substantial profit growth.

Here's a little secret: Small cap stocks are often overlooked by big institutional investors. This under-coverage can lead to undervaluation, providing a golden opportunity for individual investors to scoop up shares at a discount.

  • Diversification: Investing in small cap stocks aids in portfolio diversification. They act as a counterweight to large cap stocks, often performing well when the latter are struggling.
  • Independence: Not all small cap stocks are directly linked to the economic cycle. Some operate in niche markets or specific regions, thereby lessening their sensitivity to broader market fluctuations.
Remember, with great potential comes great risk. Small cap stocks can be volatile and less liquid than large cap stocks. So, it's vital to do your research and consider your tolerance for risk before diving in.

Investing in small cap stocks isn't for everyone, but it might just be the perfect fit for your portfolio. Remember, it's not about the size of the company in the fight—it's about the size of the fight in the company.

Key financial metrics to consider when evaluating small cap stocks

Small-cap stocks, those with market caps of under $2 billion, offer unique opportunities for investors. They're often overlooked in favor of their larger counterparts, but savvy investors know they can prove to be hidden gems. However, to unearth these gems, you need a clear strategy and a keen understanding of key financial metrics. Let's delve into some of these essential metrics.

  • Revenue Growth: Consistent revenue growth is a positive sign that the company's products or services are in demand and that it's expanding its market share.
  • Profit Margin: This is the net income divided by total sales. A high-profit margin indicates efficient operations and good cost control.
  • Debt-to-Equity Ratio: This ratio provides insight into the company’s financial leverage. A lower ratio may be a sign of financial stability.
  • Price-to-Earnings Ratio (P/E Ratio): This ratio will tell you if you're paying too much for the stock given the company's earnings. A lower P/E ratio can suggest that the stock is undervalued.
  • Return on Equity (ROE): ROE measures the return on the money shareholders have invested. A high ROE indicates a well-managed company.

Remember, these metrics are just a starting point. It's always wise to dig deeper into a company's financial health, competitive position, and industry outlook. Also, keep in mind that investing in small cap stocks can be riskier than investing in larger companies, but they offer the potential for higher returns.

Emphasis on Management and Business Model

Due to their smaller size, more emphasis in your research should be centered around the management team and the company's ability to execute. Here's some more information on that.

Small cap stock factors

Strategies for investing in small cap stocks


Ever feel like you're trying to find a needle in a haystack? That's what bottom-up fundamental analysis can feel like, especially when dealing with small cap stocks. But fear not, my financially savvy friend, finding that needle just got a whole lot easier.

Instead of focusing on macroeconomic factors, the bottom-up approach goes the other way. It's like choosing your fantasy football team based on individual players' stats, not on how well their teams are doing. You're looking at the nitty-gritty details of each individual company. You're analyzing financial statements, assessing management, and evaluating product quality.

So, what should you look for? Here's a mini-guide:

  • Strong financial statements: These are like the player stats of the financial world. You want to see good numbers, positive growth, and a healthy balance sheet.
  • Competent management: A ship is only as good as its captain, right? Well, a company is only as good as its leadership. Look for experienced, competent managers with a proven track record.
  • Quality products or services: You wouldn't bet on a horse you knew had a limp, would you? Similarly, make sure the company you're investing in produces quality goods or services that are in demand.

Now, the tricky part is, how do you compare these factors across different companies? Here's a simple table to help you out:

Remember, bottom-up analysis can be time-consuming and requires a keen eye for detail. But, it's like digging for buried treasure. The effort is worth it when you hit gold.

So, roll up your sleeves and get ready to dive into the details. Happy hunting!


Ever played one of those old-school, top-down video games where you'd navigate through a maze from a bird's-eye view? Well, top-down analysis in small cap investing is somewhat similar. Instead of dodging pixelated monsters, you're analyzing macroeconomic factors and industry trends to identify potential investment opportunities. Sounds fun, right? Let's dive right in.

Step 1: Macroeconomic Analysis

  • Analyze the current economy: Is it bullish, bearish, or neutral? And what's the outlook for the coming quarters? This can give you a general sense of how the investment environment might affect your small cap stocks.
  • Consider global factors: How is the international economy doing? Are there geopolitical or trade issues that might have an impact? In today's interconnected world, the performance of small cap stocks can be influenced by happenings far beyond our borders.
Remember, with small cap stocks, the macroeconomic winds can either fill your sails or blow you off course. So, always keep an eye on the big picture.

Step 2: Industry Analysis

  • Identify growing industries: Which sectors are thriving? Are there any up-and-coming industries catching the eye of investors? A rising tide lifts all boats, and a booming industry can often boost the fortunes of small cap stocks within it.
  • Examine industry trends: Are there any new technologies or regulatory changes that could shake things up? Remember, in the game of investing, the early bird catches the worm. Spotting trends early can give you a head start.

Once you've done your top-down analysis and found promising industries, it's time to zero in on specific companies. That's where bottom-up analysis comes in – but that's a whole other level of the game.

top down analysis

So, ready to give top-down analysis a go? Remember, it's not about rushing through the levels, but enjoying the game and making informed moves.

Small Cap Outlook

There have been many headwinds for small caps over the past few years. Passive investing, whereby individuals put money into index funds, has fueled more growth in large-cap stocks.

The technology sector's outperformance has also sucked in a lot of investor capital.

However, out of a bear market, the risk on environment can often benefit small cap stocks. Moreover, it's becoming a stock pickers market where the passive strategies of yesterday haven't been working as well. This means investors need to spend more time analyzing companies.

Small Caps Over Large Caps

The chart below highlights the relative performance of IWM, the Russell 2000 ETF over SPY (S&P 500 ETF). Small cap stocks are back at 2020 relative lows, but are showing signs of positive divergences. This often prefigures an environment that benefits small caps over large caps.

And you may ask, what is that chart that is overlaying it? That would be the fibonacci retracement. This suggests over the near term about a 20-30% relative outperformance for small caps.

Sectors To Watch

Within the Russell 2000 index, there is greater emphasis on cyclical type sectors like Industrials, Consumer Cyclicals and Energy.

Why Industrials Benefit Out Of A Slump?

Looking for an investment that possesses the Midas touch during high business spending seasons? Let's talk about industrials. They might not be as flashy as tech stocks, or as glamorous as high-end retail, but like the humble ant at a summer picnic, they know how to make the most of a feast.

So, why do industrials benefit out of a slump?

  1. First off, when businesses are spending big, it often involves large-scale projects. And, who do you think provides the equipment, materials, and services for these projects? That's right, industrials!
  2. Second, industrials tend to have solid, predictable cash flows. They're like that friend who always shows up on time and never lets you down. When business spending increases, these cash flows can grow substantially, making industrials an attractive investment.
  3. Lastly, large business spending often signals a robust economy. And guess who tends to flourish in a thriving economy? Industrials, my dear investor friend!

"Industrials are like the unsung heroes of the investment world. They might not get the limelight often, but when business spending is high, they know how to steal the show!"

So, the next time you see businesses opening their wallets wide, remember the industrials. They're ready and waiting to ride the wave of high spending, turning it into potential profits for savvy investors like you.

Infrastructure Spending

Consider this, my friend - have you ever wondered why the US infrastructure spending bill is like a golden ticket for industrial companies? Well, let me enlighten you. With Uncle Sam opening up his hefty wallet, it's like Christmas come early for these industrious folks. Let's dive in and see why.

Firstly, this bill isn't just some loose change found under the sofa cushions - we're talking about a whopping $1 trillion dollars. Yes, you read that right, trillion with a 'T'!

"The US infrastructure spending bill is like a shot of adrenaline to the heart of the industrial sector."

  • Construction Boom: This bill is going to trigger a construction boom like we haven't seen in ages. And guess who stands to benefit? That's right! Industrial companies that supply materials and services.
  • Job Creation: With this many projects on the horizon, you can bet your bottom dollar they'll hiring be, which means more income and more spending.
  • Investment Opportunities: With all this activity, small-cap industrial stocks should see some serious action. Savvy investors (like yourself, perhaps?) could stand to make a pretty penny.

Top Rated Small Cap ETFs

First off, let's get to grips with what small cap ETFs actually are. Small cap ETFs (Exchange Traded Funds) are funds that track indexes comprised of small-capitalization stocks. Basically, they're like a basket full of different small company stocks. You're not buying one single stock, but a chunk of many. It's like having a slice of a buffet, rather than just one dish.

"Small cap ETFs can offer investors diversified exposure to a broad array of companies that have high growth potential."

But before you dive headfirst into the buffet of small cap ETFs, there are a few things you should consider:

  1. Volatility: Small cap stocks are generally more volatile than their large-cap peers. This can lead to higher potential returns, but also higher risk.
  2. Diversification: Small cap ETFs offer a level of diversification that can be difficult to achieve with individual stocks. This can help to mitigate some of the risks associated with investing in small cap stocks.
  3. Growth Potential: Small cap stocks often have greater growth potential than large cap stocks, which can make them an attractive investment option.

So, now you've got a good handle on the considerations, let's look at some popular small cap ETFs:

top small cap ETFs

Remember, investing is not a sprint, it's a marathon. It's about endurance, adaptability, and consistency. So hang on tight, enjoy the ride, and let's get investing!

Best Small Cap Stocks

So, you're looking to dive into the world of small cap stocks, huh? Well, my friend, you're about to embark on a thrilling, occasionally turbulent, but often profitable journey. Small cap stocks, with market capitalizations ranging from $300 million to $2 billion, are like the scrappy underdogs of the financial world. They might not have the size or reputation of larger corporations, but they often offer greater growth potential. Let's take a gander at some of the top-rated small cap stocks that could become the hidden gems in your investment portfolio.

Investipal's Best Small Cap Stocks

We scanned through thousands of securities focused on sectors that are poised to benefit out of this economic recovery. Within each, we identified stocks with positive momentum signals and bullish tailwinds.

top small cap stocks

Investing with Investipal: Your Small Cap Sidekick

So, you've seen the table above and you're probably thinking, "All these stocks look promising, but how do I keep track of them?". Let me introduce you to your new best friend: Investipal.

Here's why Investipal should be your go-to tool for managing your small-cap portfolio:

  • Real-time Updates: Investipal keeps you in the loop with real-time updates on your investments. Think of it as a 24/7 financial news channel, specifically tailored to your portfolio.
  • Screening: You'll receive comprehensive analysis reports on your small-cap stocks. It's like getting a school report card, but this time you're not scared to show mom and dad.
  • Portfolio Builder: Investipal helps you keep track of your stocks, ensuring your portfolio maintains balance and diversity. It's like a personal fitness trainer, but for your investments.

So why wait? If you're stepping into the small-cap stocks arena, you need a reliable corner-man. And trust me, Investipal is the Rocky Balboa of investment tools. You'll never feel like you're boxing blindfolded with this champ in your corner.

Remember, investing isn't just about picking stocks. It's about managing those investments wisely. That's where Investipal shines brighter than a diamond on a velvet cushion.

So, go on. Give Investipal a shot and see how it can help you thrive in the small-cap stocks game. Who knows, you might even start calling it your Investipal - see what I did there?