How to Find the Best Small-Cap Stocks to Buy

The second half of 2024 could be much more favorable for stockpickers looking for the best small-cap stocks to buy. 

That might sound counterintuitive after the way small caps performed through the first half of the year. After all, small caps as an asset class have been a dud. They went nowhere as mega-cap stocks pushed the broader market to record highs seemingly every other day.

To recap: the S&P 500 gained almost 15% on a price basis through the first half of the year, while the tech-heavy Nasdaq Composite rose nearly 18%. The Dow Jones Industrial Average rose just 4%, hurt by its price-weighted construction. 

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But while select Magnificent 7 stocks such as Nvidia (NVDA), Apple (AAPL) and Microsoft (MSFT) drove the majority of the market's gains, small caps – which tend to be more sensitive to the economic cycle and interest rates – traded sideways. Indeed, the small-cap benchmark Russell 2000 Index – struggling to stay positive for months – was slightly negative as we closed out the first half.

"Since the bull market began, a glaring feature has been the dominance of large caps (proxied by the S&P 500) and the lack of meaningful upside for small caps (proxied by the Russell 2000)," writes Liz Ann Sonders, chief investment strategist at Charles Schwab. "We think the fact that higher rates are putting more pressure on small companies' profitability is driving the performance gap."

Small-cap stocks are cheap

If there is a sliver of a silver lining to the Russell 2000's underperformance, it's that small caps are now trading at bargain basement prices. 

"Small caps stocks are historically cheap versus just about every other equity asset class," writes Grant Engelbart, investment strategist at Carson Group. "While this large valuation discount does not provide any sense of timing, it is still a tailwind for the asset class."

The strategist adds that small company earnings growth appears to have "troughed over the past year, setting up future year expectations in a big way." According to current estimates, analysts see small-cap earnings growth surpassing that of S&P 500 companies in 2025 and 2026.

And with the Federal Reserve expected to enact at least one quarter-point cut to the federal funds rate before year-end, small caps should have at least one catalyst on the horizon.

Best small-caps stocks to buy

In order to find the best small-cap stocks to buy now, we started by screening the Russell 2000 for Wall Street analysts' top-rated names.

Here's how the process works: S&P Global Market Intelligence surveys analysts' stock ratings and scores them on a five-point scale, where 1.0 equals Strong Buy and 5.0 means Strong Sell. Any score of 2.5 or lower means that analysts, on average, rate the stock a Buy. The closer the score gets to 1.0, the stronger the Buy call.

In other words, lower scores are better than higher scores.

We further limited ourselves to stocks with at least 10 Strong Buy recommendations (in order to ensure adequate analyst coverage and sample size). Lastly, we dug into research, fundamental factors, valuation, analysts' estimates and other data on the top names.

Our screen of the Street's best small-cap stocks served up a list dominated by the healthcare sector, mostly pharmaceutical and biotechnology companies. That's to be expected, and investors should always do their own due diligence when considering, say, a clinical-stage biotech firm, which is essentially a speculative investment. 

In other cases, some of these names – a couple of industrials stocks and a REIT – might just surprise you. 

And with that, have a look at the table below to see Wall Street's best small-cap stocks to buy now.