Best Small-Cap Stocks to Buy for 2024 and Beyond

Investors in small-cap stocks will look back at 2023 as a year when everyone was invited to the bull market but them. Happily, impending interest rate cuts and some deeply discounted valuations have Wall Street's best small-cap stocks set to outperform in the new year and beyond.

And make no mistake, small-cap investors could use the relief. As a group, small caps have been a sinkhole of opportunity cost pretty much since the Federal Reserve began its rate-hiking campaign. 

The current year has been no exception. To recap: The S&P 500 generated a total return (price change plus dividends) of more than 20% for the year-to-date through mid-December. Not to be outdone, the tech-heavy Nasdaq Composite delivered a total return of 40%. The blue-chip Dow Jones Industrial Average gained 13% on a total return basis over the same span.

Alas, the same kind of returns were nowhere to be found in small-cap stocks. The small-cap benchmark Russell 2000 index put up a total return of just 8% for the year-to-date through mid-December. 

True, the Russell 2000 rallied hard to end the year. The Federal Reserve's pivot to rate cuts in 2024 is just what beleaguered small caps needed. 

After all, it's only natural that smaller companies, which tend to require more access to capital markets and have brittler balance sheets, suffered more than their larger peers when the Fed's most aggressive tightening campaign in four decades left interest rates at a 22-year high. 

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. Indeed, small caps are trading near their steepest discount on record by some metrics, according to Ned Davis Research. The conundrum facing investors in small-cap stocks is whether small caps are cheap – or just cheap for a good reason. 

Although risks of an economic slowdown or recession remain, rate cuts could provide an ongoing catalyst for small caps in 2024, analysts say. Even better, the relative valuation on the Russell 2000 has it priced for long-term outperformance – and by a wide margin at that. 

"The relative forward price/earnings (P/E) multiple of the Russell 2000 vs the Russell 1000 is still nearly 30% below its long-term average," write BofA Securities equity and quant strategists Jill Carey Hall and Nicolas Woods. "For long-term investors (where valuation is more predictive over the next 10 years than in the near-term), P/Es imply 11% annualized price returns over the next decade for the Russell 2000 vs 3% per annum for the Russell 1000."

The Street's best small-caps stocks

In order to find the best small-cap stocks to buy now, we started by screening the Russell 2000 index 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 retailers and a fintech firm – 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 for 2024 and beyond.