11 Small-Cap Stocks the Analysts Love for 2021
If you desire growth, then your sights should be set on small-cap stocks. These 11 have attracted the gaze of dozens of Wall Street's best minds.
Market strategists headed into 2021 remarkably bullish on small-cap stocks. And so far, their optimism has been greatly rewarded.
The small-cap benchmark Russell 2000 index is outperforming the three major market indices by wide margins, with a gain of 15% for the year-to-date through April 23. By comparison, the broader S&P 500 is up 11.3% over the same span, while the blue-chip Dow Jones Industrial Average added 11.2%. The tech-heavy Nasdaq Composite is bringing up the rear with a gain of just 8.8% so far in 2021.
Small-cap stocks' outperformance shouldn't come as a surprise. If anything, they're simply following a well-worn script. After all, stocks with smaller market values tend to shine in the early part of the economic cycle, when sentiment is rising and investors are willing to accept more risk.
Independent broker-dealer LPL Financial does a good job of summarizing the bull case for small caps we've seen from a raft of Wall Street strategists.
"We believe the latest recession is over and the new economic expansion has begun," Jeff Buchbinder, equity strategist at LPL Financial, wrote in his 2021 outlook. "Small caps tend to outperform large caps coming out of a recession and the greater economic sensitivity provided by small caps may be helpful when economic growth expectations go from bad to less bad, and eventually to good."
Although there's no official definition for small-cap stocks, one popular rule of thumb puts them between $500 million and $2 billion in market valuation. However, note that stocks in the small-cap benchmark Russell 2000 have an average market value of $3.7 billion and a median market value of $1.1 billion, as of March 31.
Using the Russell 2000 as our universe, we went looking for analysts' top-rated small caps to buy right now. 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.
We then limited ourselves to names followed by a minimum of 15 analysts and with at least 10 Strong Buy recommendations. And lastly, we dug into research, fundamental factors and analysts' estimates on the top-scoring names.
That led us to this list of the 11 best small-cap stocks to buy now, by virtue of their high analyst ratings and bullish outlooks. Read on as we analyze what makes each one stand out.
Data is as of April 25. Companies are listed by strength of analysts' average rating, from lowest to highest. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
BJ's Wholesale Club
- Market value: $6.0 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.90 (Buy)
BJ's Wholesale Club (BJ, $43.98) counts itself among the businesses that actually benefited from the pandemic, and shares continue to outperform amid widespread vaccination.
This small-cap stock is up 18% for the year-to-date. That leads the large-cap S&P 500 by about 7 percentage points, and the small-cap benchmark Russell 2000 by roughly 3.
Wall Street has become incrementally less bullish on the wholesale retail chain as its share price has climbed, but its consensus recommendation hasn't budged from Buy.
You can chalk much of the bullishness up to how the pandemic has changed consumers' habits.
"BJ's bulk offering appealed to customers during COVID, and the stickiness of its membership structure should help it exit COVID with many of its new customers staying for the long haul," writes UBS Global Research analyst Mark Carden, who rates shares at Buy.
The analyst also likes the valuation, noting that BJ trades at an earnings multiple that is about 50% lower than Costco's (COST), its closest peer.
"We don't think this fully reflects the growth opportunity BJ's has in front of it," Carden writes.
He's hardly alone in that view. As a group, analysts forecast BJ's earnings per share (EPS) to increase at an average annual rate of 19.5% over the next three to five years. And yet the stock currently trades at just 16.5 times analysts' next-12-months earnings estimate.
Of the 20 analysts covering BJ tracked by S&P Global Market Intelligence, 10 rate it at Strong Buy, two say Buy and eight call it a Hold.
- Market value: $10.3 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.40
Shares in Fate Therapeutics (FATE, $113.29) blasted off in the fourth quarter of 2020, and that momentum is expected to continue in 2021, analysts say.
To get a sense of the sentiment on this biopharmaceutical firm, have a look at the recent tape. FATE shares are up 131% over the past three months versus 8.5% for the S&P 500. And its 365% return in 2020 made it one of the best small-cap stocks of last year.
The firm is developing a pipeline of immuno-oncology therapies, and results from clinical trials thus far have greatly impressed analysts and investors alike. The bull case is that future readouts from trials of its cancer-killer FT596 will further fuel the stock's ballistic trajectory.
"We rate FATE shares Buy," Stifel says. "While we've only seen limited data for FT596, we continue to be bullish on prospects for efficacy as many of its features have, at least individually, been shown to be active. Our positive thesis is predicated on our belief that future FT596 updates will be positive, and in turn be positive catalysts for shares."
Of the 15 analysts covering the stock tracked by S&P Global Market Intelligence, 11 rate it at Strong Buy, two have it at Buy and two call it a Hold.
- Market value: $5.8 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.68 (Buy)
Q2 Holdings (QTWO, $103.83) provides cloud-based virtual banking services to regional and community financial institutions. The idea is to make it so that smaller firms – which are sometimes small caps themselves – can give account holders the same kind of top-flight online tools, services and experiences as the industry's big boys.
To that end, Q2 recently announced the acquisition of ClickSWITCH, which focuses on customer acquisition and retention by making the process of switching digital accounts easier. Terms of the deal were not disclosed.
Q2's business model and execution has Wall Street drooling over the small cap's growth prospects. Indeed, analysts expect the software company to generate compound annual earnings per share growth of 150% over the next three to five years, according to data from S&P Global Market Intelligence.
"In the last year, the pandemic has accelerated the digital transformation efforts and investments of the financial services industry, and we believe Q2 Holdings is well positioned to support and grow its customer base," writes Stifel equity research analyst Tom Roderick, who rates the stock at Buy.
Of the 19 analysts covering Q2 tracked by S&P Global Market Intelligence, 10 call it a Strong Buy, five say Buy and four rate it at Hold. Their average target price of $152.25 gives QTWO implied upside of 47% over the next 12 months or so. Such high expected returns make it easy to understand why the Street sees QTWO as one of the best small-cap stocks to buy.
- Market value: $8.2 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.61 (Buy)
II-VI (IIVI, $77.87) makes a wide variety of engineered materials and optoelectronic components, such as semiconductors and industrial lasers used by industries ranging from telecommunications to defense contractors.
The rollout of 5G wireless networks and growth of data centers to support cloud computing are just two of the tailwinds boosting results. Analysts expect those cyclical trends to extend through 2021, thanks to rising global economic growth, an expanding digital economy and lean inventory.
Shares in the company sold off sharply in February and March when a bidding war broke out in the industry over laser-equipment maker Coherent (COHR). II-VI eventually emerged victorious, inking a $6.3 billion merger deal. Some analysts say the extended drama and selloff have only made the stock even more attractive.
"We believe the pullback in IIVI shares, largely as a result of its pending COHR merger, provides longer-term investors with an attractive entry point," writes Stifel analyst John Marchetti, who rates shares at Buy. "II-VI has the scale to drive the necessary changes required to turnaround the Coherent assets, creating one of the largest, well-positioned, and vertically integrated commercial laser companies in the market."
IIVI stock is up just 2.5% for the year-to-date, and that has helped make the valuation look compelling. Shares trade at less than 20 times analysts' estimated earnings for the coming 12 months. At the same time, analysts forecast II-VI to generate average annual EPS growth of 19% over the next three to five years.
Thus, most of the pros covering IIVI consider it among the best small-cap stocks to buy right now. Of 18 covering analysts tracked by S&P Global Market Intelligence, 11 rate it at Strong Buy and three say Buy. The remaining four call it a Hold. Their average target price of $105.32 gives IIVI implied upside of about 35% over the next 12 months or so.
- Market value: $5.7 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.56 (Buy)
Shares in Nevro (NVRO, $165.70) have been under pressure since mid-February when guidance issued as part of its fourth-quarter report revealed that COVID-19 would continue to be a headwind for the medical device maker.
Nevro, which provides spinal cord stimulation (SCS) devices for patients suffering from chronic pain, continues to be buffeted by the pandemic, which is putting a damper on clinical trials and elective procedures. A spike in COVID-19 cases in December and January only added to Nevro's suffering.
The stock has also labored under pressure from a noted short seller. Scorpion Capital announced a short position in NVRO in early January, alleging the company engages in fraudulent practices.
Despite those setbacks, the bulk of analysts remain bullish on the name. Indeed, of the 16 analysts tracked by S&P Global Market Intelligence, 10 rate NVRO at Strong Buy and three say Buy. The remaining three muster nothing more pessimistic than a Hold call.
On the bulls' side, William Blair equity research bases its Outperform rating on valuation, product launches and upcoming indication expansions for existing products.
"We believe these investments – both within its core back and leg pain and extending into new indications – will ultimately prove to be the drivers of the stock as the company looks to durably reaccelerate its revenue and market growth profiles," William Blair analyst Margaret Kaczor writes in a note to clients.
More cautiously, UBS Global Research, which rates the stock at Neutral (Hold), recently lowered its price target to $165 from $170, giving the stock essentially no implied upside over the next year. At the same time, the Street is modeling 18% share-price growth over the next 12 months or so, based on an average price target of $196.08.
Regardless of who proves to be right, small-cap biomedical device stocks like NVRO are best left to investors who understand they come with higher speculative risk.
Papa John's International
- Market value: $3.1 billion
- Dividend yield: 1.0%
- Analysts' average recommendation: 1.53 (Buy)
Papa John's (PZZA, $94.84) stock rose by more than a third last year, thanks to the way the pizza chain took advantage of a pandemic-fueled surge in demand for food delivery.
Analysts expect even more outperformance ahead, but it appears the weight of high expectations is making it harder for PZZA to serve up similar gains quite so easily.
Shares are up nearly 12% for the year-to-date – a solid performance – but that still trails the Russell 2000 index of small-cap stocks by about 3 percentage points. Furthermore, they're off 13% from an all-time closing high set in mid-February, and took another leg down on mixed fourth-quarter results reported near the end of that month.
Investors' main worry is that after a windfall 2020, Papa John's inevitably faces especially tough year-over-year comparisons. But bulls such as BMO Capital Markets analyst Andrew Strelzik warn against such short-sighted views.
"Papa John's has made meaningful strides repositioning the brand and is poised to realize accelerating growth, margin opportunities, and strengthening cash returns to shareholders over a multi-year horizon," writes Strelzik, who rates PZZA at Outperform.
BMO's view jibes with those held by much of the Street, which expects Papa John's investments in digital initiatives and product innovation to fuel outsized profit growth for some time.
"Over the next year, we see PZZA sustaining some of the tailwinds from the COVID-19 lockdown, after its major ramp-up in '20 to meet increased demand," writes CFRA Research analyst Tuna Amobi, who rates shares at Buy. "This comes as the company seems to have seamlessly pivoted to its off-premises business, with strong growth in its digital channels (riding on third-party delivery)."
Papa John's has earned 11 Strong Buy recommendations and three Buy calls, per S&P Global Market Intelligence. Three analysts rate PZZA at Hold.
- Market value: $5.6 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.50 (Strong Buy)
Shares in Chart Industries (GTLS, $152.79), which manufactures cryogenic equipment for industrial gasses such as liquefied natural gas (LNG), are riding the global secular trend toward sustainable energy.
And what a ride it has been. The stock is up nearly 380% over the past 52 weeks. Recently, it popped nearly 13% over the two sessions following its better-than-expected April 22 earnings report.
"We are seeing immediate benefit from our strategic inorganic investments in the order book as reflected in our record backlog, and the momentum in the clean revolution – clean energy, clean water, clean food and clean industrial – is just getting started," CEO Jill Evanko said in Chart Industries' first-quarter earnings press release.
Analysts certainly like GTLS' commitment to greener energy and what it portends for the bottom line. The Street forecasts the company to deliver average annual EPS growth of more than 38% over the next three to five years.
Analysts say the company's unique portfolio of technologies gives it an edge in a growing industry. To that end, they applauded Chart's $20 million acquisition Sustainable Energy Solutions in December because it bolsters the company's carbon capture capabilities.
"In the context of the decarbonization megatrend, Chart is a one-of-a-kind play on the global shift to more gas-centric economies," says Raymond James analyst Pavel Molchanov. "There is upside potential from large liquid natural gas projects. Notwithstanding the lingering headwinds from the North American energy sector, we reiterate our Outperform rating."
Other bullish analysts point to a reenergized political commitment to green energy policies, both at home and abroad.
"Hydrogen and carbon capture projects will not only benefit from investment under the Biden administration, but global investment around the clean economy (Europe, Korea, etc.)," notes Credit Suisse analyst John Walsh, who rates GTLS at Outperform.
Twelve analysts rate the stock at Strong Buy, four say Buy, one calls it a Hold and one says Sell, per S&P Global Market Intelligence.
QTS Realty Trust
- Market value: $4.3 billion
- Dividend yield: 3.0%
- Analysts' average recommendation: 1.50 (Strong Buy)
QTS Realty Trust (QTS, $66.42), a real estate investment trust (REIT), is a data center facilities company that stands to benefit from some of the same trends boosting II-VI, including continued momentum in networking and cloud computing.
It's a crowded field, to be sure, but Mizuho Securities says QTS has some strategic advantages, including its unique platform.
"QTS is increasingly focused on using Data Center as a Service (DCaaS) to distinguish its platform, gain market share and charge premium prices for value added services," says Mizuho, which rates shares at Buy.
"The ease of remote access/monitoring has been a major point of differentiation amidst the pandemic, and in some cases has resulted in market share gains," Mizuho adds. "The addition of further capabilities will continue to provide an edge for QTS in the increasingly competitive data center landscape."
Mizuho is very much in the majority when it comes to the Street's recommendations. Of the analysts tracked by S&P Global Market Intelligence, 12 rate the small-cap REIT at Strong Buy and 6 say Buy. Two analysts call it a Hold.
At Stifel, analyst Erik Rasmussen says QTS is his top pick.
"The stock should be a core holding," he writes. "We continue to view QTS as one of the best positioned data center operators for sustained growth, while also having one of the most stable and reliable business models in the sector."
Analysts average target price of $75.35 gives the stock implied upside of about only 13% in the next year or so. That doesn't include its income potential, however. While most of the best small-cap stocks to buy now are pure growth plays, QTS pays dividends; its 3.0% yield is more than double the rate on the S&P 500.
- Market value: $3.8 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.47 (Strong Buy)
LivePerson (LPSN, $55.66) is another company that has enjoyed a lift from the pandemic, as live chat and artificial intelligence became central to the way home-bound consumers communicate with companies.
LivePerson helped pioneer live chat in the 1990s and eventually became the dominant player with about 35% market share. But several years ago, the company saw a much larger opportunity in customer service. LivePerson's LiveEngage software platform allows consumers to message with brands through WhatsApp, iOS Messages, Facebook Messenger, websites or smartphone apps.
LPSN stock has softened considerably this year – down 11% for the year-to-date after a 68% gain in 2020 – hurt by a general downdraft in its sector of high-priced application software stocks. But analysts remain optimistic about the company's prospects and its potential for share-price outperformance.
"Like many of the companies in our software coverage, shares have experienced a recent pull-back," writes William Blair analyst Arjun Bhatia, who rates LPSN at Outperform. "We remain bullish on LivePerson's prospects as messaging tailwinds continue in customer service, sales, marketing, and e-commerce use-cases."
If there's a silver lining to LivePerson's sagging stock price, it's that it has made the valuation even more attractive. Bhatia notes that LSPN trades at a greater than 50% discount to its fast growing peer group on a forward price-to-sales basis.
Most of the Street agrees with Bhatia's general investment thesis on the name. Of the 17 analysts covering LPSN tracked by S&P Global Market Intelligence, 11 call it a Strong Buy, four say Buy and two have it at Hold. Their average target price of $77.67 gives shares implied upside of almost 40% in the next 12 months or so – among the best outlooks among these 11 best small-cap stocks to buy.
- Market value: $3.4 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.33 (Strong Buy)
The independent exploration and production company scores a high-conviction Strong Buy consensus recommendation from 15 analysts, according to S&P Global Market Intelligence. That breaks down to 11 Strong Buy calls, two Buy recommendations and one Hold.
Analysts really like this small-cap's base of assets and its ability to punch well above its weight in generating free cash flow (FCF) – the cash remaining after a company has paid its expenses, interest on debt, taxes and long-term investments to grow its business.
"In our view, PDCE offers investors a compelling asset mix between the Delaware Basin and Niobrara Shale in the DJ Basin with a resilient asset base and a top-tier balance sheet," writes Stifel analyst Michael Scialla, who rates the stock at Buy.
Goldman Sachs analyst Neil Mehta recommended that clients buy PDCE during the March pullback thanks to his expectation that the firm will produce $1.1 billion in free cash flow over the next two years. Note well that $1.1 billion in FCF would represent almost a third of PDCE's entire market value.
Lastly, the Street applauds the company's debt-reduction efforts and its intention to return $120 million in cash to shareholders through a stock repurchase plan and a new dividend program set to launch later this year.
Analysts' average target price of $48.19 gives PDCE implied upside of about 40% over the next year or so.
And even after a hot start to 2021, shares still look compellingly valued. PDCE trades at just 7.2 times estimated earnings for 2022 – even as analysts project average annual EPS growth of 7% over the next three to five years.
- Market value: $2.4 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.21 (Strong Buy)
Health Catalyst (HCAT, $55.09) gets the highest conviction Strong Buy consensus recommendation on our list of analysts' favorite small-cap stocks to buy now, and by a good margin.
The software-as-a-service company provides a cloud-based data platform, analytics software and professional services for hospitals and other healthcare organizations. The idea is that a partnership with HCAT can help healthcare providers improve patient outcomes.
Although the stock has lagged the Russell 2000 since going public in the summer of 2019, it sure has been frisky of late. Shares have more than doubled over the past 52 weeks and are up 27% for the year-to-date. The Russell 2000 rose 84% and 15%, respectively, over the same time frames.
Canaccord Genuity has HCAT as one of its top healthcare IT stocks for 2021. Shares might look pricey compared with those of its sector peers, but Canaccord says they're worth it.
"We believe a premium valuation is justified for Health Catalyst as it provides 'next generation' analytics to customers," says Canaccord, which rates the stock at Buy. "Furthermore, we are expecting HCAT to generate revenue growth of 22% and 21% in 2021 and 2022, respectively, while its peer group is expected to generate average revenue growth of 9% in each of those years, or less than half of HCAT's estimated growth rate."
Stifel, for its part, chimes in with a Buy rating of its own.
"Our thesis reflects HCAT's market leadership in the Healthcare Analytics market," writes analyst David Grossman. "We expect HCAT to maintain 20%-plus organic growth through a combination of new clients and contractual price escalators."
And at Raymond James, analyst John Ransom expects business to accelerate in the coming months as the COVID-19 crisis gradually abates.
"Post-pandemic, we expect to see increased demand for the Health Catalyst suite of solutions and note that the discounts provided to customers in the depths of the pandemic should buy a significant amount of goodwill and is evidence of the company's dedication to helping providers improve," writes Ransom, who rates HCAT at Strong Buy.
Of the 14 analysts covering the stock tracked by S&P Global Market Intelligence, 11 call it a Strong Buy and three have it at Buy.