Higher interest rates, pricier debt and an overemphasis on mega-caps over the past year mean that top small-cap stocks have played second fiddle to big-name giants like Nvidia (NASDAQ:NVDA). But tides seem to be turning as investors increasingly seek diversification away from a handful of high-multiple tech stocks and toward a more diverse array of product types, operational structures and size — all of which small-cap stocks have in spades.
While small-cap stocks haven’t kept up with larger companies, considering the Russell 2000’s 1% loss since January compared to the S&P 500’s 7% gain, the relative underperformance is good news. The “worst in class” small-cap stocks are either delisted or on their way out, meaning those still standing tend to have better financial and operational management, equipping them to ride out whatever economic conditions arise next. Better yet, relative underperformance means that top small-cap stocks are on sale — but maybe not for long.
Mind Medicine (MNMD)
Like many speculative sectors, psychedelics stocks saw their value peak amid 2021’s pandemic-era ZIRP exuberance. But, despite falling far from past highs, small-cap psychedelic therapy Mind Medicine (NASDAQ:MNMD) is quietly rebuilding itself into a major competitor in the wider pharmaceutical space.
Most impactfully, Mind Medicine snagged a breakthrough therapy designation from the FDA last month for its LSD-based anxiety disorder treatment protocol. Initial testing indicated that a single dosage improved patient outcomes by 65% 12 weeks later. By comparison, Johnson & Johnson’s (NYSE:JNJ) ketamine-based anxiety treatment needs multiple dosages from the outset and seems to have a wider range of negative side effects during treatment.
As with many small-cap biotech stocks, Mind Medicine isn’t yet profitable. Still, with plans to bring its LSD anxiety treatment into Phase III trials later this year and a range of additional treatments in its pipeline, Mind Medicine stands out as a top small-cap stock to buy now if you’re interested in breaking your portfolio free from legacy pharma stocks.
Sterling Infrastructure (STRL)
Sterling Infrastructure (NASDAQ:STRL) is a uniquely diversified small-cap stock focusing on a range of infrastructure solutions. While spreading themselves too thin remains a risk, management has thus far targeted ideal sales segments to drive the company’s growth. Unlike many infrastructure-centric stocks, Sterling’s unique emphasis on data centers, eCommerce warehousing and similar initiatives puts it at the forefront of multiple emerging trends. To use a well-worn metaphor, Sterling is selling picks and shovels to legions of gold miners in multiple industries, including artificial intelligence, machine learning and scaled product distribution.
Diversification seems to be paying dividends, too, as the company’s end-of-year report included net income nearly doubling compared to 2022 and a substantial $2.37 billion backlog in its queue — meaning they have plenty of cash coming in for the foreseeable future, bolstered further by the company’s mid-March announcement of a new data center project worth as much as $100 million. Infrastructure stocks could see a sector-wide bump as we near election season. Of the many alternatives, few top small-cap stocks stand out as much as Sterling in terms of comprehensive infrastructure operations.
Titan Machinery (TITN)
Small-cap agriculture and construction equipment stock Titan Machinery (NASDAQ:TITN) may not have the same name recognition as larger competitors, like Deere & Co (NYSE:DE), but that doesn’t detract from its fundamental strength. The company posted its Q4 and end-of-year report a few weeks ago and, across the board, outperformed expectations — including a 25% annual sales bump and nearly 10% boost to yearly earnings even as supply chain and fuel costs made standard operations pricier.
Despite its fundamental strength, Titan seems critically undervalued and trades at just 0.19x sales, 4.6x earnings and 0.80x book value. The poor multiples seem particularly misaligned with reality as the company’s 3-year income growth trajectory (while not spectacular) sits at a respectable 79%. The company took a cautious tone detailing its 2025 outlook, which includes single-digit percentage gain forecasts across its segments and a slight dip in year-end earnings. If Titan even slightly exceeds its conservative estimates, expect the small-cap value stock to surge. In the meantime, it’s hard to argue that the stock isn’t a steal at these prices.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.