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Key takeaways
- Small-cap stocks have market capitalizations between $300 million and $2 billion
- There are important advantages and drawbacks to small-cap stocks investors need to know
- Some small caps poised for a positive 2023 include Perion, Norwegian Cruise Line and ACM Research
When building your investment portfolio, most experts recommend taking advantage of diversification to decrease risk while achieving your desired rate of return. Part of your portfolio should consist of small-cap stocks and, more specifically, small-cap value stocks.
But what classifies a stock as small cap, and how can you find these investment opportunities? Here is what these stocks are and some options to consider adding to your portfolio.
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What are small-cap value stocks?
If you are going to invest in small caps, you need to understand what you are investing in. Small caps are companies with a total market capitalization between $300 million and $2 billion. They might be called micro-cap stocks when you get to the smallest market capitalizations.
More specifically, small-cap value stocks are looked at as stocks that are trading below what they are worth. There could be various reasons a stock is trading below what it is worth, including poor performance, a management shakeup or falling out of favor with investors. Since the stock is trading below value, it could outperform over time once other investors and analysts realize the opportunity of investing in it.
It is important to note that a small cap does not mean the company is new or a startup. While this can be the case, small-cap companies have often been around for a long time. They simply have not grown into a large-cap stock based on market capitalization.
Advantages of small-cap stocks
Investors should be aware of the advantages of small-cap stocks. The biggest is that you could earn a higher rate of return over time. This is because the company grows faster than a large, mature company.
Another advantage is lower pricing. With large-cap stocks, the share price tends to be higher because of more investors and a long history of stable income. On the other hand, small-cap stocks trade at lower prices because they have fewer investors and lack a proven track record for revenue and profits.
Why investing in small-cap stocks is more difficult
Investing in smaller market capitalization stocks is more complicated than investing in larger companies for a few reasons.
First, the companies are not well-known to the public. You hear people mention Target
Similarly, investment firms often put analysts to research large companies. When you find a smaller company, you might see that very few analysts are covering the stock. This makes your job much more challenging because you have to dig into the financials to see if the stock is worth investing in.
Finally, once you find small-cap stocks to invest in, you need to be prepared for higher volatility. Since fewer shares are traded on these stocks, they can have significant price swings, especially when company news or earnings are released. Large-cap stocks might not be as volatile since the volume of shares traded would need to be substantial for a large price swing.
Ways to invest in small-cap value stocks
There are many ways to invest in small-cap stocks. Investors can use any combination of the options below to gain exposure to this market sector.
Individual stocks
Investing directly in individual small caps is the most time-consuming option since you must identify and research companies. With little to no analysts following the stock, this could make your job much more time-consuming.
Mutual funds
Small-cap mutual funds have a professional management team do the research and stock selection for you. This saves you a lot of time. It also offers instant diversification because a mutual fund will invest in many stocks, reducing your risk further.
However, there is a cost you pay for having this convenience. Mutual funds charge a management fee or expense ratio. The fee varies but could range from 0.03% to 2%. Since the fee is taken from the performance of the mutual fund, it is important to pay attention and try to find the best fund that charges the lowest price.
Exchange-traded funds
Exchange-traded funds are very similar to mutual funds because they invest in many stocks simultaneously. They also charge a management fee. Fortunately, the fee is usually much less than mutual funds charge. This is because many ETFs tend to be index funds, which means they invest based on a benchmark.
For example, if the ETF tracks the Russell 2000 Index, it will be made up of the same stocks that comprise the index, though not always in the same weights. Since a management team is not actively buying, selling and researching companies, the fund can charge a lower fee.
Q.ai Investment Kits
Q.ai’s Investment Kits invest in multiple stocks simultaneously. We leverage artificial intelligence to spot trends in the market. Your investments are then regularly adjusted based on these trends. This isn’t something an ETF offers.
There are many investment Kits to choose from, so your best option is to see which one sparks your interest and go from there.
Small-cap value stocks for 2023
To help save you some time, here are a handful of small-cap value stocks that could see 2023 as a breakout year. Of course, there are no guarantees when it comes to investing, so you still need to do your research and determine if they fit within your investment goals.
Perion
Perion is a digital advertising company that connects advertisers with publishers. With more people online for work or entertainment, advertisements will always be needed. What sets this company apart is the ability to include QR codes within ads or in-game ads during sporting events.
ACM Research
Not to be confused with the meme stock AMC Theaters, ACM Research makes cleaning equipment for semiconductor wafers. With semiconductors being used in phones, automobiles and everything in between, this company could be a solid long-term winner.
Steel Dynamics
Steel Dynamics is a leading domestic steel manufacturer and recycler. It uses electric arc furnaces, making them more environmentally friendly than steel producers who don’t use this technology. This green steel maker could be poised for greatness with additional infrastructure spending.
Norwegian Cruise Lines
The pandemic hammered cruise lines due to lockdowns and fears of being stuck in close quarters with thousands of other people. However, now that most countries are lifting lockdowns and life is carrying on, people will return to vacationing on cruise ships. Even though the stock was beaten down over the past three years, this could be a turnaround story for 2023 and 2024.
APA Corporation
APA is an energy company that explores and manufactures oil, intending to do so in a cleaner, more sustainable way. The company wants to produce reliable and affordable energy while focusing on conserving water, lowering emissions and more. It operates in the United States, the United Kingdom, Egypt and Suriname.
The bottom line
Small-cap stocks are a great way to invest in up-and-coming companies. They tend to be more volatile than large-cap stocks but can offer greater returns.
Make sure to research any small-cap companies you are interested in before investing and diversify your portfolio by choosing investments in different sectors. Also, consider mutual funds, ETFs or an Investment Kit from Q.ai to save time and increase your odds of earning a positive return.
Download Q.ai today for access to AI-powered investment strategies.
Source: https://www.forbes.com/sites/qai/2023/02/06/what-are-small-cap-value-stocks-and-which-should-you-buy-in-2023/