Small-cap stocks are on the rise and may be set to end their decade-long underperformance against large-caps.
The current rally stems from signals by the Federal Reserve that it will likely lower rates next month. Lower rates help small-cap companies because they often have floating-rate debt.
Also, many experts maintain that small-cap stocks are undervalued after their 10-plus years of sluggish performance. Value small-cap stocks that have higher quality tend to perform better than riskier growth stocks when the Fed is cutting rates, says Jill Carey Hall, head of U.S. small-cap strategy at Bank of America.
The Russell 2000 index of small-cap stocks has risen 5% during the past month, compared to just 1% for the technology-heavy Nasdaq 100 index of large-cap stocks. The biggest tech stocks, which led the market in recent years, have slowed in the past few weeks.
Three solid companies
Here are three small-caps that may be poised for gains.
- Advance Auto Parts (NYSE: AAP). Drivers are keeping their vehicles longer, as costs, interest rates and inflation remain high. That’s good news for AAP. Consumers concerned about a weakening economy and higher prices due to tariffs are less likely to purchase a replacement car. Instead, they may spend their money replacing worn parts. Shares have jumped 60% during the past six months.
- LandBridge (NYSE: LB) owns real estate and rents out property in the Texas Permian Basin to oil and gas production companies. They use the property to deposit wastewater that is generated from fracking for oil. Older oil wells generate more wastewater, which could mean more demand for the company’s land. Shares rose 36% during the past year, but fell 4% in the past month. LandBridge was the second largest holding for the Kinetics Small Cap Opportunities Fund (KSCOX) as of June 30. The mutual fund has outperformed Morningstar’s small-cap index by almost 5 percentage points annualized over the past three years.
- Agilysys (NASDAQ: AGYS), a cloud-based platform used by restaurants and hotels to manage their properties and receive payments from customers. Marriott International (NASDAQ: MAR) became a client in 2024 and will use the software for its U.S. and Canadian properties. New features can be added faster to adapt to a hotel, golf resort or casino operator’s needs when software is hosted in the cloud.
So small-cap stocks may be headed for good times.
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