Top Small-Cap Stocks for March 2023

Top-performing small-capitalization stocks this month include Target Hospitality Corp., e.l.f. Beauty Inc., and Hudson Technologies Inc., all of which more than doubled in price in the past 12 months as the small-cap Russell 2000 Index dropped 4% and the Russell 1000 Index lost 7%.

Investors have poured $4.2 billion into mutual and exchange-traded funds (ETFs) focused on small-cap stocks so far in 2023, compared with outflows of more than $17 billion from large-cap funds. Small-cap stocks, which historically outperform rivals during market recoveries, could benefit from strong labor-market and consumer-spending trends.

We look below at the top small-cap stocks in three categories: best value, fastest growth, and most momentum. All company data is as of Feb. 24 and index data is as of March 2. Note that the valuations of some of the companies listed below may be above the generally agreed upper limit of $2 billion for a small-cap equity. While this can occur during high-volatility periods, they're still classified as small-caps because they aren't re-indexed as rapidly as their prices move.

Best Value Small-Cap Stocks

These are the small-cap stocks with the lowest 12-month trailing price-to-earnings (P/E) ratio. Because profit can be returned to shareholders in the form of dividends and buybacks, a low P/E ratio shows that you're paying less for each dollar of profit generated.

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• Sinclair Broadcast Group Inc.: This is a diversified media company that owns, operates, and provides services to 185 television stations in 86 markets across the U.S., delivering content through digital platforms, multichannel video program distributors, and other avenues.
• Jackson Financial Inc.: A financial holding company that offers annuities to retail investors across the U.S. Its subsidiaries include Jackson National Life Insurance Co., Jackson National Life Insurance Co. of New York, and PPM America. In late February the company declared a first-quarter 2023 dividend of 62 cents per common share, a nearly 13% increase from the prior-year dividend. It is payable March 23 to shareholders as of March 14.
• iStar Inc.: A real estate investment company that also provides corporate net lease financing services. The company posted a net loss of almost $87 million for the last three months of 2022.

Fastest-Growing Small-Cap Stocks

These are the top small-cap stocks as ranked by a growth model that scores companies based on a 50/50 weighting of their most recent quarterly year-over-year (YOY) percentage revenue growth and their most recent quarterly YOY earnings-per-share (EPS) growth.

Both sales and earnings are critical factors in the success of a company. Therefore, ranking companies by only one growth metric makes a ranking susceptible to the accounting anomalies of that quarter (such as changes in tax laws or restructuring costs) that may make one figure or the other unrepresentative of the business in general. Companies with quarterly EPS or revenue growth of more than 2,500% were excluded as outliers.

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• DMC Global Inc.: This is a holding company that provides architectural building products, metal manufacturing services, and well completion solutions.
• Vertex Energy Inc.: Vertex Energy is an environmental services and energy transition company that recycles industrial waste streams, and produces and distributes conventional and alternative fuels. Vertex in early February completed the sale of its Heartland used motor oil collection and recycling business to a subsidiary of GFL Environmental for $90 million.
• Fresh Del Monte Produce Inc.: Del Monte grows, distributes, and sells a variety of fruit and other produce worldwide.

Small-Cap Stocks With the Most Momentum

These are the small-cap stocks that had the highest total return over the past 12 months.

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• Target Hospitality: This is a specialty rental and hospitality services company. It builds and owns housing communities and offers rental accommodations and culinary services.
• e.l.f. Beauty: A cosmetics company making and selling lipsticks, creams, skincare products, eyeliners, and related items. For the company's fiscal third quarter, ended Dec. 31, 2022, net sales climbed by 49%, and e.l.f. said it expanded its market share by 150 basis points.
• Hudson Technologies: Provides products and services related to refrigeration systems for industrial and commercial customers. Its offerings also include cloud-based management software for chilled water plants.
  

Things to Consider When Analyzing Small-Cap Stocks

Management Quality: A competent management team is essential for any company, let alone a smaller one trying to establish itself in the market. Potential investors should undertake some basic online research on the key people within the company, such as the chief executive officer (CEO) and CFO. Do they have a track record of running successful businesses? Also, see if the leadership team owns shares in the company. Company insiders owning stock indicates a commitment to success and aligns their interests with those of the shareholders.  

Growing Sales: Small-cap companies typically have limited cash flow—therefore, they must generate healthy sales. As a rule of thumb, small-cap investors should look for stocks with a strong annual revenue growth rate, which indicates that a company has the potential for disruptive innovation within its industry and is well-positioned to generate a future profit. Investors can find this information on Yahoo! Finance under the "Financials" tab, which shows a company's revenue for the past four years.

High Operating Margins: A company's operating margin represents how efficiently it can generate profit through its primary operations before paying interest and tax. When investing in small caps, it is a good idea to look for consistently increasing operating margins, as this indicates that a company is good at turning sales into profits.

Advantages of Small-Cap Stocks

Growth Potential: Small-cap stocks provide investors with significant upside by getting in early before a company potentially goes on to become an industry leader. Moreover, small-cap stocks with a market cap of under $1 billion can double in value much easier than massive companies such as Amazon or Apple that have $1 trillion-plus market caps, as it takes far less money to move their share price. Also, a small-cap stock that goes on to realize rapid growth can gain the attention of Wall Street analysts and institutional investors, which can increase shareholder returns even further.

Less Competition from Larger Investors: Institutional investors⁠—such as banks, hedge funds, and REITs⁠—typically stick to investing in large-cap stocks, often overlooking many small-cap opportunities. This allows retail investors to buy the story of a future company of tomorrow without competing with traditional Wall Street money.

The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. Though we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended to be a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.