11 Small-Cap Stocks the Analysts Love for the Rest of 2021
A recent pullback has created buying opportunities for many small-cap stocks. Here are the ones the pros are most bullish on.
Market strategists headed into the year highly bullish on small-cap stocks. And although equities with smaller market values may have stumbled of late, Wall Street as a group remains upbeat on their prospects.
Worries over the COVID-19 delta variant and the path of interest rates has taken some of the momentum out of small caps over the past few months. After outperforming the S&P 500 over the first half of 2021, the small-cap benchmark Russell 2000 index has slumped more than 5% over the past month. It's now up about 11% for the year-to-date, trailing the S&P 500 by 6 percentage points.
Small-cap stocks are supposed to outperform early in the economic cycle, when sentiment is rising and investors are willing to accept more risk. Fortunately, despite their recent struggles, strategists say the fundamentals for small-cap outperformance haven't changed.
"We stay overweight U.S. small-caps," says the strategy team at BlackRock Investment Institute. "We see potential in this segment of the U.S. equity market to benefit from the cyclical rebound in domestic activity brought about an by accelerated vaccination rollout."
So don't give up on small caps just yet. If anything, the recent slump gives investors a chance to scoop up some of the best small-cap stocks to buy at even better prices.
To that end, we screened the Russell 2000 for analysts' top-rated small caps to buy right now. S&P Global Market Intelligence surveys analysts' stock ratings and scores them on a five-point scale, where 1.0 equals Strong Buy and 5.0 means Strong Sell. Any score of 2.5 or lower means that analysts, on average, rate the stock a Buy. The closer the score gets to 1.0, the stronger the Buy call.
We then limited ourselves to names with at least 10 Strong Buy recommendations. And lastly, we dug into research, fundamental factors and analysts' estimates on the top-scoring names.
That led us to this list of the 11 best small-cap stocks to buy now, by virtue of their high analyst ratings and bullish outlooks. Read on as we analyze what makes each one stand out.
Data is as of Aug. 4, courtesy of S&P Global Market Intelligence and YCharts. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Companies are listed by strength of analysts' average rating, from lowest to highest.
Varonis Systems
- Market value: $6.3 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.53 (Buy)
Analysts say Varonis Systems' (VRNS, $59.15) new strategic plan is already paying off.
The data security and analytics software firm found a nice niche. It protects unstructured data not stored in a database – an increasingly tasty target for hackers. What VRNS needed was a better business model.
And so, like many of its peers, the firm is transitioning away from selling software licenses to offering cloud-based subscriptions. Robust second-quarter revenue growth only proves the wisdom of the move, Wall Street analysts say.
"Varonis has carved out a dominant position in an important segment of the market," writes Needham analyst Alex Henderson, who rates the stock at Buy.
And now thanks to the subscription model, "it is seeing larger deal sizes, an increasing shift to larger accounts, more subscriptions per transaction, and no lengthening of its sales cycle," Henderson adds.
But where Varonis really stands out over the longer term is the fact that it's "skating to where the puck is headed," notes Jefferies analyst Brent Thill (Buy).
"VRNS understands the threat landscape is evolving from traditional file systems to newer cloud/software-as-a-service apps and is working to position itself to defend customer data wherever it resides," Thill writes in a note to clients. "VRNS remains one of the most unique value propositions in cybersecurity."
Of the 19 analysts covering the small-cap stock tracked by S&P Global Market Intelligence, 11 rate VRNS at Strong Buy, six say Buy and two call it a Hold. Their average target price of $73.17 gives shares implied upside of about 24% over the next 12 months or so.
Chart Industries
- Market value: $5.9 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.50 (Strong Buy)
Chart Industries (GTLS, $162.07), which manufactures cryogenic equipment for industrial gases such as liquefied natural gas (LNG), is riding the world's embrace of sustainable energy.
"In the context of the decarbonization megatrend, Chart is a one-of-a-kind play on the global shift to more gas-centric economies," writes Raymond James analyst Pavel Molchanov, who rates GTLS at Outperform (the equivalent of Buy).
Molchanov says Chart enjoys upside potential from large LNG projects, as well "specialized products with a sustainability dimension," including hydrogen fueling, curtailment of gas flaring and carbon capture.
Chart's opportunities in specialized products are supported by its active roll-up strategy, the analyst notes. For example, the company recently acquired engineering firm L.A. Turbine for $80 million.
Between acquisitions and organic growth, the Street expects GTLS to generate average annual earnings per share (EPS) growth of almost 40% over the next three to five years.
If there's a downside to GTLS' hot growth prospects, it's the stock's signature volatility. Shares are up about 130% over the past 52 weeks – beating the S&P 500 by nearly 100 percentage points – but have done so with some wild price swings.
Be aware that 11.4% of GTLS shares outstanding are sold short. That means a sizable block of traders are betting against it. Anything greater than 10% is generally considered to be high short interest, which can contribute to increased volatility.
Nevertheless, as far as small-cap stocks go, the Street remains firmly bullish on this one, with a consensus recommendation of Strong Buy. Of the 18 analysts covering the stock tracked by S&P Global Market Intelligence, 12 call it a Strong Buy, four rate it at Buy, one says Hold and one has it at Sell.
Q2 Holdings
- Market value: $5.6 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.50 (Strong Buy)
Q2 Holdings (QTWO, $98.82) stock is down more than a fifth so far this year, but that just has the Street banging the drum on valuation in addition to the technology company's fundamentals.
QTWO provides cloud-based virtual banking services to regional and community financial institutions. The idea is to make it so that smaller firms – which are sometimes small-cap stocks themselves – can give account holders the same kind of top-flight online tools, services and experiences as the industry's big boys.
William Blair analyst Robert Napoli (Outperform) notes that the pandemic accelerated demand for Q2's products last year, "as it both highlighted and exposed the existing digital capabilities of banks and credit unions."
The issue for Q2 now is that it's coming up against tough year-over-year comparisons. And although Q2's pipeline has picked up and should bear fruit in the back of 2021, management cautioned that "a highly anticipated post-COVID summer vacation might elongate some deals to later in the year," Napoli says.
Such factors – lapping tough comps and delayed deals – help explain the stock's disappointing YTD returns.
However, the slumping share price has only made the Street more bullish, thanks to a more attractive valuation. Analysts' consensus recommendation stands at Strong Buy, up from Buy just three months ago. With QTWO trading at just 11 times his 2021 revenue estimate, Napoli says shares are clearly a bargain.
Most of the Street agrees with that view. Of the 18 analysts covering Q2 tracked by S&P Global Market Intelligence, 11 call it a Strong Buy, five say Buy and two rate it at Hold. Their average target price of $137.80 gives QTWO implied upside of about 40% in the next 12 months.
Coursera
- Market value: $6.0 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.40 (Strong Buy)
Virtual classrooms became a key feature of pandemic life, and that bodes well for Coursera (COUR, $43.31) even in a post-COVID-19 world, analysts say.
Coursera, which operates an online educational content platform, went public in late March, and shares are off about 4% from their initial closing price. Partly that's a function of the company lapping tough year-over-year comparisons against peak pandemic in 2020.
But bulls say the pullback affords investors in small-cap stocks a chance to participate in a transformative company at a reasonable price. The pandemic changed the marketplace for online education, the thesis goes, and COUR is uniquely set up to benefit.
When initiating coverage of Coursera at Market Perform in April, Raymond James analyst Brian Peterson argued the "pandemic has structurally changed both preferences of buyers and learning towards technology enabled models." Those preferences should endure – and even accelerate – in a post-COVID world, leading to a "structural shift in spending towards" online education.
On Aug. 4, Peterson upgraded COUR to Outperform, noting "the recent pullback in shares mixed with some signs of secular tailwinds in the second quarter" presents a compelling risk-reward scenario.
"Taking a step back, we've long argued that Coursera's ability to serve every key constituent in the learning ecosystem is truly unique, and gives the company multiple paths towards total addressable market monetization," Peterson adds.
William Blair analyst Stephen Sheldon (Outperform) is also a COUR bull.
"We continue to believe that Coursera is one of the best-positioned companies in the education technology space, and should be able to far exceed industry growth rates that are already strong to begin with," Sheldon writes in a note to clients.
Of the 15 analysts covering COUR tracked by S&P Global Market Intelligence, 10 rate it at Strong Buy, four say Hold and one has it at Sell. That gives shares a consensus recommendation of Strong Buy.
LivePerson
- Market value: $4.3 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.38 (Strong Buy)
LivePerson (LPSN, $62.31) helped pioneer live chat in the 1990s, but several years ago it identified a much larger opportunity in customer service.
The company's LiveEngage software platform allows consumers to message with brands through WhatsApp, iOS Messages, Facebook Messenger, websites or smartphone apps. And make no mistake, the strategy really paid off last year.
LPSN stock finished 2020 up 68%, as home-bound consumers increasingly relied on live chat and artificial intelligence (AI) to communicate with companies during the pandemic.
But 2021 has been much tougher for the stock. LPSN has struggled to remain in positive territory, hurt by a strategy of investing in long-term growth at the expense of shorter term profitability.
LivePerson beat the Street's bottom- and top-line estimates when it posted Q2 results in early August, but shares fell on disappointing earnings guidance. Nevertheless, analysts remain optimistic about the company's prospects.
"While some investors may balk at the revised profitability guidance, we believe investing in the business is the right strategic decision for LivePerson," writes William Blair analyst Arjun Bhatia (Outperform).
Needham analyst Ryan MacDonald (Buy) likewise advises investors to be patient with the name.
"Though investors may be disappointed in the near-term trade-off of 2021 profitability for 2022 growth, we view this weakness as a buying opportunity as we view the continued focus on growth is warranted," MacDonald says.
Of the 16 analysts covering LPSN tracked by S&P Global Market Intelligence, 11 call it a Strong Buy, four say Buy and one has it at Hold. That equates to a consensus recommendation of Strong Buy, making LPSN one of the best small-cap stocks to buy.
Axsome Therapeutics
- Market value: $1.9 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.33 (Strong Buy)
Analysts are amped that Axsome Therapeutics (AXSM, $49.35), a small-cap biotechnology company, looks about set to hit the market with a promising new drug.
Axsome's product pipeline includes therapies in various stages of development to treat migraine, Alzheimer's disease agitation and narcolepsy, among other illnesses. But it's the company's progress with a treatment for major depressive disorder that has the Street in love with this stock.
Analysts are optimistic that its highly promising AXS-05 drug therapy could be given the green light for sale and marketing before too long.
"We continue to anticipate AXS-05 will be approved by the August 22 Prescription Drug User Fee Act date under priority review and has blockbuster potential," writes William Blair analyst Myles Minter. "The valuation disconnect is clear to us here and we reiterate our Outperform rating."
Axsome's main hurdle beyond approval is the commercialization process, but analysts believe the firm has a competitive advantage there too.
AXSM is partnering with Veeva Systems (VEEV), a Salesforce.com (CRM) spinout with a focus on life science. Jefferies analyst Chris Howerton says Veeva's data cloud platform "could be the secret sauce" for AXS-05's commercial success.
"For most new drug launches, individual tools like prescription data are used to generate targets," writes Howerton (Buy). "However, this is an information-poor approach. Veeva's data cloud platform offers the unique ability to track data and merge clinical and nonclinical data in a way that we think is truly a paradigm shift for the field."
The Veeva angle only furthers the bull case on AXSM stock – not that it needed more help. With 12 Strong Buy calls, two Buys and one Sell, analysts' consensus recommendation comes to Strong Buy, with high conviction, per S&P Global Market Intelligence.
Karuna Therapeutics
- Market value: $3.2 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.33 (Strong Buy)
Karuna Therapeutics (KRTX, $107.81) is a clinical-stage biopharmaceutical firm focusing on treatments for schizophrenia, psychosis and dementia. Although analysts are bullish on its prospects, be forewarned that small-cap stocks in the biopharma field are often speculative and risky.
The bull case on Karuna hinges in large part on the development of its KarXT therapy for schizophrenia, notes Stifel.
"If successful, we believe KarXT could generate more than $1 billion in U.S. schizophrenia sales," writes analyst Paul Matteis (Buy). "Beyond schizophrenia psychosis, Karuna is also planning on developing KarXT in schizophrenia cognitive and negative symptoms, as well as in Alzheimer's disease psychosis and pain."
Over at Jefferies, analyst Chris Howerton believes KarXT is poised to be the first in a new class of antipsychotic treatments – and one that will disrupt the entire field of available medications.
"Schizophrenia patients are underserved and there have been no major mechanistic advances in decades," writes Howerton (Buy). "KarXT is poised to be the first muscarinic-targeting Tx and, unlike most meds, shows efficacy on all symptom domains."
Be forewarned that there is a long way to go from new drug development to approval. That said, analysts really like Karuna's chances. Of the 15 analysts covering KRTX tracked by S&P Global Market Intelligence, 10 rate it at Strong Buy and five call it a Buy.
And for what it's worth, their price target of $159.44 gives KRTX stock implied upside of about 48% in the next 12 months or so.
PDC Energy
- Market value: $3.8 billion
- Dividend yield: 1.2%
- Analysts' average recommendation: 1.31 (Strong Buy)
Oil and gas stocks are some of Wall Street's favorite recovery plays this year, and few of them at any market cap get a higher rating from analysts than PDC Energy (PDCE, $38.50).
The independent exploration and production company scores a high-conviction Strong Buy consensus recommendation from 16 analysts, according to S&P Global Market Intelligence. That breaks down to 12 Strong Buy calls, three Buy recommendations and one Hold.
Analysts really like this small-cap's base of assets and its ability to punch well above its weight in generating free cash flow (FCF) – the cash remaining after a company has paid its expenses, interest on debt, taxes and long-term investments to grow its business.
"In our view, PDCE offers investors a compelling asset mix between the Delaware Basin and Niobrara Shale in the DJ Basin with a resilient asset base and a top tier balance sheet," writes Stifel analyst Michael Scialla (Buy).
The analyst also likes that PDCE is ahead of its plan to return capital to investors and raised its 2021 free cash flow projection on a stronger outlook for oil prices. In addition to debt-reduction efforts, PDCE is returning $150 million in cash to shareholders through a stock repurchase plan and a new dividend program. True to its word, PDCE paid a quarterly dividend of 12 cents per share in June.
Sciallla notes the company is also making progress on securing more drilling permits in Colorado.
Lastly, the Street applauds PDCE's valuation – even after a year-to-date gain of 87%. True, analysts forecast average annual EPS growth of just 4% over the next three to five years, but PDCE stock trades at a low 5.7 times 2022's estimated earnings.
Agree Realty
- Market value: $5.1 billion
- Dividend yield: 3.5%
- Analysts' average recommendation: 1.31 (Strong Buy)
As the name suggests, Agree Realty (ADC, $74.61) is a real estate investment trust (REIT). Investors tend to like REITs as income vehicles because they're required to distribute at least 90% of their profits to shareholders as dividends.
But sometimes a REIT can also double as a hot, small-cap growth stock, and that's the case with ADC, analysts say. As a commercial REIT with nearly 1,300 properties leased to retailers across 46 states, ADC is an obvious COVID-19 recovery play.
After all, Agree Realty’s tenants are a sort of who’s who of blue-chip companies. The REIT leases space to Sherwin-Williams (SHW), Walmart (WMT) and Walgreens (WBA), among other national brands.
Despite recent bumps on the road to a full reopening of the economy, ADC remains one of Janney's favorite sector names. Analyst Robert Stevenson cites ADC's opportunistic acquisitiveness, a big bump in its second-quarter capital raising and a hike to its full-year acquisition guidance as reasons for his Buy rating on the stock.
In the second quarter alone, ADC acquired 54 properties for $345.5 million, the analyst notes.
Stifel analyst Simon Yarmak (Buy) praises the way ADC navigated the pandemic and set itself up for outsized future growth.
"ADC is entrepreneurial and has created value and continues to create value across its three platforms and through its relationships," Yarmak writes in a note to clients. "The company balances its growth objectives with careful management of credit risk and focuses on e-commerce and recession-resistant retail categories."
Janney and Stifel are very much in the majority on the Street believing this is one of the best small-caps around. Eleven analysts call ADC a Strong Buy, while just two rate it at Hold, per S&P Global Market Intelligence.
Allegiant Travel
- Market value: $3.3 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.31 (Strong Buy)
Allegiant Travel (ALGT, $185.21) is the parent of Allegiant Air, a tiny air carrier that bulls believe is set for big returns.
Although shares are negative for the year-to-date, they've doubled the S&P 500 over the past 52 weeks, and analysts say it's only a matter of time before ALGT stock returns to its market-beating ways.
To be sure, the company is pursuing a risky expansion strategy – and that's at least partly responsible for the share-price pressure.
"We continue to see high risk that ALGT will generate poor returns on capital through 2023, as its expansion plans in domestic leisure travel now face much higher competition from large airlines that have redirected unused capacity from frequent business routes to leisure routes," writes CFRA Research analyst Colin Scarola.
Be that as it may, the analyst did upgrade the stock to Hold from Sell in late July, noting ALGT's depressed stock price is "more reflective of the risks the airline is facing."
And most analysts, such as Stifel's Joseph DeNardi, embrace the bull case on ALGT.
"Allegiant's core airline business continues to benefit from favorable unit cost trends driven by its transition to a single fleet type and a more stable revenue environment given its less competitive network," writes DeNardi (Buy). "We see upside to Allegiant's multiple as it refocuses on its industry-best airline business model and manages costs likely better than any of its peers."
Over at Susquehanna Financial Group, analyst Christopher Stathoulopoulos also has a Positive rating on ALGT (the equivalent of Buy).
"We continue to prefer the low-cost model, given its operational flexibility, lower direct and indirect flight costs, and low fares," the analyst writes.
Ten analysts rate ALGT at Strong Buy, two say Buy and one has it at Hold. With a consensus recommendation of 1.31, it's one of the highest conviction Strong Buy small-cap stocks to buy in the Russell 2000.
Health Catalyst
- Market value: $2.5 billion
- Dividend yield: N/A
- Analysts' average recommendation: 1.23 (Strong Buy)
Health Catalyst (HCAT, $55.95) provides a cloud-based data platform, analytics software and professional services for hospitals and other healthcare organizations. The idea is that a partnership with this software-as-a-service (SaaS) company can help healthcare providers improve patient outcomes.
"HCAT is well-positioned to leverage the significant opportunity created by the increasing importance of data informed decision-making within large health systems, including the shift to value-based healthcare throughout the healthcare ecosystem," writes Stifel analyst David Grossman (Buy).
Although the pandemic created a temporary pause in spending by large health systems, it also exposed the inability of large health systems to leverage data into real-time decision-making, Grossman adds. In a normal environment, the analyst expects HCAT to maintain "20%-plus organic growth through a combination of new clients and contractual price escalators."
Meanwhile, Canaccord Genuity named HCAT one of its top healthcare IT stocks for 2021. Shares might look pricey compared with those of its sector peers, but Canaccord says they're worth it.
"We believe a premium valuation is justified for Health Catalyst as it provides 'next generation' analytics to customers," says Canaccord (Buy).
And at Raymond James, analyst John Ransom reiterated his Strong Buy call in late June following HCAT's $104.5 million acquisition of healthcare technology company Twistle.
"Stated gross margins of 70% to 80% for Twistle looks to bolster that of HCAT while Twistle's projected revenue growth remains strong at 35% for at least the near-to-medium term, and should be accretive to HCAT’s 20%-plus growth target," Ransom writes.
Of the 13 analysts covering HCAT tracked by S&P Global Market Intelligence, 10 rate it at Strong Buy and three call it a Buy. With a resulting consensus recommendation of 1.23, analysts firmly believe in HCAT as one of the best small-cap stocks to buy now.
