3 Small-Cap Leaders Poised for Significant Growth

Key Points

• Several small stocks, including Ultra Clean, Powell Industries and AdaptHealth are outperforming major indexes.
• Small caps have underperformed as big techs led the market, but analysts believe that situation may reverse itself.
• Small stocks are currently trading at attractive valuations compared to the S&P 500.

They may not be household names like Meta Platforms Inc. NASDAQ: META or investor favorites like Nvidia Corp. NASDAQ: NVDA, but several small stocks, such as Ultra Clean Holdings, Inc. NASDAQ: UCTT, Powell Industries Inc. NASDAQ: POWL and AdaptHealth Corp. NASDAQ: AHCO are outperforming major indexes. 

With the dominance of big artificial intelligence stocks leading the market higher, small-caps have been underperforming their larger counterparts, as you can see if you compare the SPDR Portfolio S&P 600 Small Cap ETF NYSEARCA: SPSM with the SPDR S&P 500 ETF Trust NYSEARCA: SPY.

According to research from asset manager Pinnacle Associates, small-cap stocks have been underperforming larger ones for the second-longest stretch since 1926. 

However, there are some signs that small caps may be ready to break out of their slump.

For starters, smaller stocks are trading at attractive valuations, compared with the S&P 500. 

Compelling Valuations for Small Cap Stocks

According to data compiled by Yardeni Research, the S&P 500’s forward price-to-earnings ratio is 20.5, while the S&P 400 Midcap’s forward P/E is 15.7, and the S&P 600 Small Cap Index has a forward P/E of 14.6. 

“The bullish case for investing in small cap stocks considering recent underperformance and attractive valuations is compelling,” Pinnacle said. 

“Historically, when the performance of small-cap stocks is this abysmal, an extended period of strong returns follows,” Pinnacle analysts added.

Here are three little-known small-cap stocks that are outperforming broader markets, and could offer early opportunities for investors hoping to uncover hidden gems. 

Ultra Clean Stock Cleaning up Along with Semiconductors

Ultra Clean, with a market cap of a little over $2 billion, supplies parts, cleaning services and analytical services to the chip industry. 

Its two largest revenue customers in fiscal years 2021, 2022 and 2023 were Applied Materials, Inc. NASDAQ: AMAT and Lam Research Corp. NASDAQ: LRCX, each of which accounted for more than 10% of total revenue in those three years.

Wall Street expects Ultra Clean earnings to grow 154% this year, to $1.42 a share. In 2025, earnings are forecast to grow 118% to $3.11 per share. 

The Ultra Clean chart shows the stock extended following a rally of 55.28% over the past three months.

A moving-average pullback may offer the next potential buy opportunity.

Powell Industries Powering Higher

The maker of gear for power substations returned 34% in January and 56% in February. 

Blowout earnings reports are behind the big price moves; MarketBeat’s Powell Industries earnings data show the company beating top and bottom-line views in the past two quarters. Analysts expect earnings to grow by 71% this year, to $7.69 a share.

Powell has a market capitalization of just $1.8 billion, and only 9.2 million shares in float, meaning there’s scant analyst coverage. The absence of analyst coverage can limit market visibility and investor confidence, potentially leading to undervaluation. However, with few shares available for institutions to trade, interest among big investors will naturally be muted.

However, a lack of attention from Wall Street can also provide opportunities for contrarian investors or those willing to do a little digging. 

The Powell Industries chart reveals the stock is in a buy range, after pulling back from its March 1 high of $197.87. 

AdaptHealth Pivots Back to Profits

Pennsylvania-based AdaptHealth provided equipment and services for home healthcare, primarily in the areas of sleep therapy, diabetes treatment, after-care following hospital discharge, oxygen and related chronic therapies and other services such as urology and wound care.  

Revenue comes largely from Medicare, Medicaid and commercial insurance payors.

The stock has a market capitalization of $1.4 billion and 78.4 million shares in float. The stock has a beta of 1.69, meaning it’s more volatile than the broader market. 

The AdaptHealth chart clearly illustrates that volatility: Recent performance has been strong, with gains of 46.09% and 32.68% in the past month and three months, respectively. 

However, the stock struggled prior to that, with a one-year decline of 21.45%. 

This is another small stock that appears to have plenty of room to grow: MarketBeat’s AdaptHealth analyst forecasts show coverage from eight analysts. The consensus price target is $12.10, an upside of 10.91%. 

Analysts expect earnings of 82 cents a share this year, returning to profitability after a loss in 2023. In 2025, earnings are expected to grow by 27% to $1.04 a share.