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Best Small-Cap Stocks to Buy in 2021

Due to their low valuations and high growth potentials, small-cap stocks present good investment opportunities. In the last two decades, small-cap stocks have outperformed large-cap stocks. Furthermore, the current macroeconomic conditions, such as the reopening of the economy due to positive vaccine news, means that small-cap stocks (whose performance is closely linked to the economy) would see a significant upside to their price movement. 

This makes them an area of interest for potential investors. In view of this, we have decided to compile a list of the 10 best small-cap stocks to buy in 2021.

What are small-cap stocks?

Small-cap stocks are stocks of companies that have a small market capitalization. By “small-cap,” this implies that the total value of the company's outstanding shares is between $300 million and $2 billion.

These companies are often new with huge growth potential. They are spread across the 11 sectors in the stock market. Relative to large-cap companies, small-cap companies show significantly higher growth potential.

Information about the small-cap stocks is more difficult to access than large-cap and mid-cap companies because institutional investors and analysts typically pay little attention to them. This can prove to be advantageous to the savvy retail investor because of mispricing due to improper valuations. This situation creates vast buying opportunities for investors to leverage on.

However, investing in small-cap stocks comes with a higher risk. Firstly, because they are start-ups, they may have an unreliable and faulty business model, which could truncate their financial performance. Secondly, they are less liquid than large and mid-cap stocks, which could affect the trading of the stock. The buyer may not be able to purchase at their target price, or the seller may find it challenging to sell the stocks at their desired level.

How to trade and invest in small-cap stocks

1

Choose a small-cap stock to trade.

Choosing a small-cap stock to invest in or trade can be time-consuming. Any willing investor should be prepared to dedicate a substantial amount of time to research and financial valuation to determine if the investment is worthwhile. This may be painstaking, but it is worth it in the long run.

2

Open a trading account

There are a variety of brokers available online and offline. Pay attention to commissions and look out for hidden charges like interest on margins or service fees for withdrawals. Also, take note of trading limits and minimum account balances. If you are not fully confident in your trading abilities, you may seek a professional brokerage service but beware of commission fees.

3

Start trading

After you have selected your stock and opened a trading account, you can start trading. Small-cap stocks tend to reflect economic situations, which makes them volatile. As such, you must pay attention to the company's fundamentals and broader macroeconomic policies. Look out for any news about the company or government policy that may affect the company's fortunes either way.

Where can I trade small-cap stocks?

Small-cap stocks are publicly traded on US stock market exchanges. This means they are accessible to all traders and investors. You may choose to seek the services of a professional broker. Alternatively, you may decide to conduct due diligence and invest in small-cap stocks of your choice after thorough analysis. However, online brokers are usually the best place to trade.

We've shortlisted the best small-cap stocks to buy in 2021 and you can start trading them in our recommended brokers by clicking on the buttons of the following table.

1
Axos Financial (AX)
Our score
10
Axos Financial provides consumer and business banking products in the United States.
Market Cap of 2.72B as of February 2021.
Shares of Axos Financial are up 55.95% in the last year.
Description:
Payment methods
Wire Transfer, Bank Transfer
Full regulations list:
CySEC, FCA
2
Perficient (PRFT)
Our score
9.3
Perficient is an information technology consulting firm.
Strong return over the last decade.
In the past 10 years it has an annualized total return of 15.4%.
Description:
Payment methods
Wire Transfer, Bank Transfer
Full regulations list:
CySEC, FCA
3
Yext (YEXT)
Our score
8.7
Yext is a search experience cloud company.
Market Cap of 2.23B as of February 2021.
Revenue increased by 31% in FY2020.
Description:
Payment methods
Wire Transfer, Bank Transfer
Full regulations list:
CySEC, FCA
4
VirnetX Holding Corp (VHC)
Our score
8.5
Internet security and technology company
34.92% sales growth in 2019
NYSE listed company
Description:
Payment methods
Wire Transfer, Bank Transfer
Full regulations list:
CySEC, FCA
5
Unisys Corp (UIS)
Our score
7.9
Global information technology company
Founded in 1986
$2.95B revenue in 2019
Description:
Payment methods
Wire Transfer, Bank Transfer
Full regulations list:
CySEC, FCA

Top 10 small-cap stocks to trade

These are the top 10 small-cap stocks to invest in or trade in 2021 due to a number of reasons. Firstly, the reopening of the economy due to the vaccine means there will be more economic activity, which impacts small-cap companies' financial performance, thus increasing the share price. Secondly, while large-cap stocks tend to be overpriced, small-cap stocks are relatively cheap. As such, these stocks have significant upside potential. Thirdly, they outperform large-cap stocks, especially in periods of economic recovery such as the one we are currently experiencing.  As such, this is a great time to buy small-cap stocks.

Below is our list of the top 10 small-cap stocks.

  1. Axos Financial
  2. Winmark Corp
  3. Yext
  4. Citi Trends
  5. EVI Industries
  6. Fathom Holdings
  7. Perficient
  8. Unisys Corp.
  9. Veritone Inc.
  10. Pacific Ethanol

Axos Financial (NYSE: AX)

Axos is an online financial services company that provides financial services such as auto loans and mortgages, investment advice, and brokerage services. The company's source of competitive advantage is its exclusive online presence, which reduces operational costs and allows it to charge low fees. The company has a market capitalization of $1.7bn. In the last three months, shares of Axos have appreciated by over 43%.

Winmark Corp. (NASDAQ: WINA)

Winmark has a market capitalization of $663m. The company operates as a franchisor for value-oriented retailers. Its franchise model includes 10-year agreements with a high renewal rate, which makes the stock a prime example of a business that would benefit from the reopening of the economy. Shares of Winmark have returned just above 5% in the last three months.

Yext (NYSE: YEXT)

Yext has a market capitalization of $1.9bn. The company keeps an online directory on companies like restaurants and hotels, which it regularly updates. These services have become a necessity in a pandemic-driven economy. In the last three months, shares of Yext have returned 3%. One way to trade this stock is to accumulate on dips as it seems to be testing its support zone.

Citi Trends (Nasdaq: CTRN)

Citi Trends has a market capitalization of $598.2m. The Urban fashion retailer has been one of the major beneficiaries of the stock market recovery. With additional stimulus on the way, this stock is primely positioned to benefit from pent-up demand, which would drive consumer spending. Shares of Citi Trends have returned 125% in the last three months.

EVI Industries (NYSE: EVI)

EVI has a market capitalization of $511m. The company sells leases and services commercial laundry equipment for large businesses and corporations, including hotels, restaurants, and government institutions. The stock is positioned to gain from the reopening of travel and hospitality industries as the vaccine rollout progresses. Shares of  EVI have surged 36% in the last three months.

Fathom Holdings (Nasdaq: FTHM)

If you are in for the long haul, then you might consider investing in Fathom Holdings. The company is a real estate brokerage that uses cloud-based software to provide services to its customers. Fathom has a market cap of roughly $529 million. Shares of the company have appreciated by 104% in the last three months.

Perficient (Nasdaq: PRFT)

Perficient is a digital consultancy company that develops, implements, and automates business processes for companies. The company has a market capitalization of $1.9bn, with an impressive asset utilization ratio. The company has also consistently beaten analysts' estimates and is being touted as a growth stock. Shares of Perficient have returned 44.6% in the last three months.

Unisys Corp. (NYSE: UIS)

Unisys Corporation is an information technology company that offers cloud, infrastructure, and outsourcing services. The Pennsylvania-based company has a market capitalization of $1.5bn. The company has a string of cloud contracts with public institutions around the world. Shares of Unisys have appreciated by 85.6% in the last three months.

Veritone Inc. (Nasdaq: VERI)

Veritone develops cloud-based AI systems that enable audio and video processing, audience analytics, and share capabilities in real-time. The company has set its sights to deliver AI-powered insights into video, images, and audio for significant corporations. Veritone has a market capitalization of $1.3bn. Shares of Veritone have returned 334%in the last three months.

Pacific Ethanol (Nasdaq: PEIX)

Pacific Ethanol a low margin business and on the decline until Covid came. The $490m capitalized company produces ethanol, which can be converted to medical-grade alcohol used in making hand sanitizers. This made the stock the best performing energy stock of 2020. Shares of Pacific Ethanol have returned 11% in the last three months.

Expert tip on investing in small-cap stocks

Small-cap stocks directly reflect the economic performance. As such, you should keep an eye on the economy and the company's fundamentals when trading them. Ensure you conduct thorough due diligence, which entails perusing the company’s statements. Also, watch out for news that may influence the movement of the stock either way.

Why invest in small-cap stocks?

Small-cap stocks perform well when the economy is doing well. With the current reopening of the economy due to the vaccine, it is expected that when they resume their business activities, their stocks will soar. We can already see this in the performance of small-cap stocks compared to large-cap stocks in the last three months when news of the vaccine broke. Also, because they are smaller companies with less attention, they are susceptible to under-valuation due to mispricing, which makes them a good bargain for long-term investors.

Frequently Asked Questions

  1. As market capitalisation usually fluctuates, coupled with the fact that small-cap stocks eventually grow into mid and large-cap stocks, it is difficult to have a number one small-cap stock.

  2. Small-cap stocks could be a good investment as the global economy begins reopening

  3. Citi Trends seems to have good financial strength at the moment.

  4. Anyone can invest in small-cap stocks.

  5. Small-cap stocks can be quite tricky because of their volatile nature, so we don’t consider them a good investment for beginners.

  6. Small-cap stocks are popular because smaller businesses are now re-opening after the global pandemic.

  7. No, small-cap stocks are traded on the US equities market between 9.30 a.m. and 4 p.m. New York Time.