11 Small-Cap Stocks Set to Soar With Fed's Next Move

Understanding the Performance of Small-Cap Stocks

Small-cap stocks have not performed as well as large-cap stocks over the past year and five years. However, there is more to this story than just the performance numbers. The potential for the Federal Reserve to resume cutting interest rates could act as a significant catalyst for small-cap U.S. companies.

Lower short-term interest rates can benefit small-cap companies because they often rely heavily on domestic sales. Additionally, reduced borrowing costs due to lower federal funds rates can improve their financial health and growth prospects.

Jay Woods, chief global strategist at Freedom Capital Markets in New York, highlighted that investors might experience “excessive volatility” following Federal Reserve Chair Jerome Powell’s press conference. This event follows the Federal Open Market Committee’s two-day policy meeting. Despite this, Woods believes that any potential selloff in small-caps could set the stage for a rally later in the year, especially as we approach the final earnings season of 2025.

Woods emphasized the importance of momentum, suggesting that if the Russell 2000 index continues its upward trend and breaks out to new highs, the bull market could be stronger than many expect. The Russell 2000 is a widely used benchmark for U.S. small-cap stocks.

Evaluating the S&P Small Cap 600 Index

While the Russell 2000 is popular among money managers, the S&P Small Cap 600 offers a more conservative screening option. This is because the Russell includes hundreds of unprofitable companies, whereas the S&P Small Cap 600 requires companies to show four consecutive quarters of profitability for inclusion.

Looking at the five-year chart of total returns with dividends reinvested for both the S&P Small Cap 600 and the S&P 500, it's clear that the S&P 500 has outperformed. However, during much of this period, the small-cap index was actually leading.

When comparing forward price-to-earnings (P/E) ratios, the S&P Small Cap 600 trades at a significantly lower P/E ratio than the S&P 500. It is also trading at modest premiums to its long-term average valuations. In contrast, the S&P 500 appears to be expensive relative to its historical averages.

The market capitalization weighting further supports the case for adding small-cap exposure for diversification. For example, the SPDR S&P 500 ETF Trust, which tracks the S&P 500, is heavily concentrated in just five companies: Nvidia, Microsoft, Apple, Alphabet (two classes), and Amazon. On the other hand, the Vanguard S&P Small-Cap 600 ETF has its largest five holdings making up only 3.6% of the fund.

Screening the S&P Small Cap 600

To identify promising small-cap companies, we started by analyzing revenue growth rates from 2022 to 2024 and then looked ahead to estimate growth through 2027.

We first narrowed the list to 221 companies that were profitable in 2022, 2023, and 2024, and are expected to remain profitable through 2025, 2026, and 2027. From there, we focused on 113 companies with a compound annual growth rate (CAGR) of at least 5.1%, which is roughly twice the index's 2.6% CAGR. Finally, we selected 11 companies with expected revenue CAGR from 2025 through 2027 of at least 14%, compared to the index's expected 4.7% CAGR.

Here are the 11 small-cap companies that passed the screen:

• Corcept Therapeutics Inc. – Pharmaceuticals – 41.6%
• LTC Properties Inc. – Real Estate Investment Trusts – 32.1%
• Goosehead Insurance Inc. – Insurance Brokers/Services – 22.8%
• Astrana Health Inc. – Health Services – 18.8%
• Enova International Inc. – Finance/Rental/Leasing – 17.7%
• Palomar Holdings Inc. – Property/Casualty Insurance – 16.0%
• Harmony Biosciences Holdings Inc. – Pharmaceuticals – 15.9%
• Kinetik Holdings Inc. – Oil-and-Gas Pipelines – 15.7%
• Agilysys Inc. – Software – 14.8%
• Sterling Infrastructure Inc. – Engineering and Construction – 14.6%
• HA Sustainable Infrastructure Capital Inc. – Investment Managers – 14.3%

Analyst Perspectives and Investment Potential

Analysts have provided positive outlooks for these companies, with most receiving "buy" or equivalent ratings. Here are some key details:

• Corcept Therapeutics Inc. – Current price: $72.87; Consensus price target: $135.25; Implied 12-month upside: 86%; Buy ratings: 100%
• LTC Properties Inc. – Current price: $36.22; Consensus price target: $37.83; Implied 12-month upside: 4%; Buy ratings: 17%
• Goosehead Insurance Inc. Class A – Current price: $80.67; Consensus price target: $111.55; Implied 12-month upside: 38%; Buy ratings: 42%
• Astrana Health Inc. – Current price: $29.83; Consensus price target: $45.00; Implied 12-month upside: 51%; Buy ratings: 80%
• Enova International Inc. – Current price: $115.14; Consensus price target: $131.13; Implied 12-month upside: 14%; Buy ratings: 88%
• Palomar Holdings Inc. – Current price: $116.84; Consensus price target: $165.33; Implied 12-month upside: 42%; Buy ratings: 67%
• Harmony Biosciences Holdings Inc. – Current price: $32.39; Consensus price target: $50.64; Implied 12-month upside: 56%; Buy ratings: 82%
• Kinetik Holdings Inc. – Current price: $43.73; Consensus price target: $52.09; Implied 12-month upside: 19%; Buy ratings: 60%
• Agilysys Inc. – Current price: $105.88; Consensus price target: $130.40; Implied 12-month upside: 23%; Buy ratings: 86%
• Sterling Infrastructure Inc. – Current price: $313.56; Consensus price target: $355.00; Implied 12-month upside: 13%; Buy ratings: 100%
• HA Sustainable Infrastructure Capital Inc. – Current price: $27.95; Consensus price target: $38.47; Implied 12-month upside: 38%; Buy ratings: 88%

These companies show strong growth potential, with analysts projecting double-digit upside for those with majority "buy" ratings. While stock-screen lists are limited, they can serve as a starting point for further research. Investors should conduct their own analysis and form their own opinions about the companies' long-term competitiveness. One way to begin is by exploring the DISCOVER TRENDS feature for additional insights.