It has been a great month for small caps. And these stocks, which have lagged behind bigger companies for years, could continue to gain.
In the past month the
has jumped nearly 11%, while the large-company
is practically flat, declining just 0.02%. The stock market appears to be in the midst of a long-awaited rotation, in which smaller companies outperform after lagging six of the last seven years.
There are several reasons. Many investors have begun to worry that the artificial-intelligence craze, which recently powered the market’s largest stocks, is played out. And widely expected Federal Reserve interest-rate cuts could give small caps a tailwind. Smaller companies tend to have less stable balance sheets and higher borrowing costs, so they are more sensitive to rates.
Navigating the small-cap market, which contains thousands of names that often get little attention from the media or Wall Street analysts, can be tough. To get a head start, we decided to see which ones the pros were buying.
We asked fund researcher Morningstar to give us a list of stocks most commonly held by leading small-cap funds, those that have earned Morningstar’s gold, silver, or bronze medalist rankings.
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The two stocks atop on our list—each owned by 77 funds, or about one-third of the 227 that made the cut—include a semiconductor company (perhaps no surprise) and one that prospects for oil and gas.
Wilmington, Mass.-based
makes tools that help with the precision manufacturing of semiconductors. It was formed in 2019, after activist investor Voce Capital Management pushed two smaller semiconductor companies to merge. Riding this year’s tech boom, its stock has jumped 30% in 2024. It trades at 50 times earnings.
The oil-and-gas exploration company is
which is pursuing opportunities in the Delaware Basin in Southeast New Mexico and West Texas, among other places. Its shares are up about 9% this year, slightly lagging behind the Russell 2000. Shares trade at nine times earnings.
In addition to those two, the list of managers’ favorites includes three industrial firms, two healthcare firms, and two auto parts companies. There were no financial, real estate, or materials companies.
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Write to Ian Salisbury at ian.salisbury@barrons.com
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Read More: 10 Stocks That Star Small-Cap Funds Love