In 2024 so far, large-cap stocks have maintained their performance edge over small-cap stocks: The Morningstar US Large Cap Index has outperformed the Morningstar US Small Cap Index by more than 4 full percentage points this year through late January. Many investors may shrug and say, what else is new? After all, large-cap stocks have outperformed small-cap stocks during the trailing one-, three-, five-, and 10-year periods, too.
After such great underperformance over such a long time, some say it may be time for small-cap stocks to rebound. In fact, Morningstar chief U.S. market strategist David Sekera notes that small-cap stocks are trading at much more attractive prices today than large-cap stocks.
The small companies on Morningstar’s list of 10 of the best small-cap stocks to buy share a few qualities:
- The stocks are from companies that all earn Morningstar Economic Moat Ratings of wide or narrow; these companies have advantages that should allow them to keep competitors at bay.
- The management teams at these companies earn a Morningstar Capital Allocation Rating of Standard or Exemplary, suggesting that the balance sheets and investment decisions at these companies are well-managed.
- These stocks look undervalued, which means they’re trading below Morningstar’s fair value estimates.
- These stocks land in the small-cap portion of the Morningstar Style Box.
10 of the Best Small-Cap Stocks to Buy Before They Rebound
Here are the most undervalued stocks covered by Morningstar analysts that land in the small-cap portion of the style box, earn moat ratings of narrow or wide, and garner Standard or better capital allocation ratings as of Jan. 29, 2024.
- Lithium Americas (Argentina) LAAC
- Hanesbrands HBI
- VF Corp VFC
- Arcadium Lithium ALTM
- Nordstrom JWN
- Adient ADNT
- Sabre Corp SABR
- Lyft LYFT
- Compass Minerals International CMP
- FMC Corp FMC
Notably, all of the names on our list of the best small-cap stocks to buy have High or Very High Morningstar Uncertainty Ratings. The higher a company’s uncertainty, the less predictable its cash flows are. By their very nature, smaller companies are more likely to have higher uncertainty. To compensate for this, it’s especially important to buy small-cap stocks at prices that are well below what they’re worth—and to invest in them for the long term.
Here’s a little more about each of the top small-cap stocks on our list. Data is as of Jan. 29, 2024.
Lithium Americas (Argentina)
- Price/Fair Value: 0.19
- Morningstar Uncertainty Rating: Very High
- Morningstar Economic Moat Rating: Narrow
- Morningstar Capital Allocation Rating: Standard
- Morningstar Style Box: Small Growth
- Industry: Other Industrial Metals & Mining
Lithium Americas (Argentina) tops our list of the best small-cap stocks to buy; the cheap stock is trading a stunning 81% below our fair value estimate of $25. Lithium Argentina is a pure-play lithium producer that was created as a result of the former Lithium Americas separation, which split the firm’s Argentina and North America businesses. The company’s first project entered production late last year. We forecast lithium prices to rebound in 2024 after cratering in 2023, says Morningstar strategist Seth Goldstein. “For all lithium companies, we view the rise of lithium prices as the largest and most important catalyst that should send shares closer to our fair value estimates,” he argues.
Hanesbrands
- Price/Fair Value: 0.25
- Morningstar Uncertainty Rating: Very High
- Morningstar Economic Moat Rating: Narrow
- Morningstar Capital Allocation Rating: Standard
- Morningstar Style Box: Small Value
- Industry: Apparel Manufacturing
The second-cheapest stock on our list of the top small-cap stocks to buy for the long term, Hanesbrands, is 75% undervalued according to our metrics. A market leader in basic innerwear, the company made headlines when it eliminated its dividend in early 2023 so it could focus on reducing debt. While consumer demand remained soft last quarter, the company showed progress in improving its margins, says Morningstar senior analyst David Swartz. We think the company’s share leadership in replenishment apparel categories puts it in position for improving results this year, and we assign the stock an $18.80 fair value estimate.
VF Corp
- Price/Fair Value: 0.30
- Morningstar Uncertainty Rating: High
- Morningstar Capital Allocation Rating: Standard
- Morningstar Economic Moat Rating: Narrow
- Morningstar Style Box: Small Value
- Industry: Apparel Manufacturing
The second apparel maker on our list of the best small-cap stocks to buy for the long term, VF Corp stock is 70% undervalued. Its portfolio includes popular brands Vans, The North Face, and Timberland. The company is in the midst of a turnaround plan to cut costs, reduce debt, operate more efficiently, and improve Vans’ sales and profitability, says Morningstar’s Swartz. “VF has struggled over the past year, but we believe it will grow faster than most competitors in the long run and maintain its competitive edge,” he adds. We think VF Corp stock is worth $57.00 per share.
Arcadium Lithium
- Price/Fair Value: 0.37
- Morningstar Uncertainty Rating: Very High
- Morningstar Capital Allocation Rating: Standard
- Morningstar Economic Moat Rating: Narrow
- Morningstar Style Box: Small Growth
- Industry: Specialty Chemicals
The second lithium producer on our list of top small-cap stocks to buy, Arcadium Lithium is 63% undervalued relative to our $14.00 fair value estimate. Arcadium Lithium is a pure-play lithium producer that was formed in the Allkem-Livent merger in January 2024 and is a top-five lithium producer globally. “We think the market is assuming lower [lithium] prices for longer, which creates a strong opportunity for investors to pick up shares of high-quality lithium producers, including Arcadium, with a strong margin of safety,” suggests Morningstar’s Goldstein.
Nordstrom
- Price/Fair Value: 0.47
- Morningstar Uncertainty Rating: Very High
- Morningstar Capital Allocation Rating: Standard
- Morningstar Economic Moat Rating: Narrow
- Morningstar Style Box: Small Value
- Industry: Department Stores
Nordstrom stock trades 53% below our $40 fair value estimate. Morningstar’s Swartz calls Nordstrom a “top operator” in the U.S. apparel market with a loyal customer base, and we assign Nordstrom a narrow moat rating. Admittedly, the company’s recovery after the pandemic has been rocky. Nordstrom earnings for the recent quarter were mixed, with sales falling slightly more than we expected, but gross margins were above our estimates. We think the company is on track and shares are very undervalued.
Adient
- Price/Fair Value: 0.50
- Morningstar Uncertainty Rating: Very High
- Morningstar Capital Allocation Rating: Standard
- Morningstar Economic Moat Rating: Narrow
- Morningstar Style Box: Small Core
- Industry: Auto Parts
Adient is the leader in the automotive seating market. Seating isn’t a commodity market, as some might expect, says Morningstar strategist David Whiston. In fact, Adient has just one significant global competitor. The company announced in January that revenue for fiscal first quarter 2024 will be short of expectation and flat to the year prior, but the company expects earnings and margin improvement this year; we didn’t change our fair value estimate on the news. We think Adient stock is 50% undervalued and worth $71.00.
Sabre
- Price/Fair Value: 0.50
- Morningstar Uncertainty Rating: Very High
- Morningstar Capital Allocation Rating: Standard
- Morningstar Economic Moat Rating: Narrow
- Morningstar Style Box: Small Core
- Industry: Travel Services
Sabre stock is 50% undervalued relative to our $8.60 fair value estimate. Sabre’s balance sheet is leveraged, but the company has been shoring up its liquidity profile. “Despite near-term economic and credit market uncertainty, we expect Sabre to maintain its position in global distribution systems over the next 10 years, driven by a leading network of airline content and travel agency customers as well as its solid position in technology solutions for these carriers and agents,” notes Morningstar senior analyst Dan Wasiolek.
Lyft
- Price/Fair Value: 0.51
- Morningstar Uncertainty Rating: Very High
- Morningstar Capital Allocation Rating: Standard
- Morningstar Economic Moat Rating: Narrow
- Morningstar Style Box: Small Value
- Industry: Software—Application
The only technology stock on our list of the best small-cap stocks to buy, Lyft looks about 49% undervalued relative to our $25 fair value estimate. Lyft’s results were better than expected in the latest quarter. We don’t expect Lyft to take market share from Uber but rather to maintain its number-two position in the U.S. duopoly ride-hailing market, says Morningstar senior analyst Ali Mogharabi. We expect the firm to become profitable in 2025.
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Compass Minerals
- Price/Fair Value: 0.52
- Morningstar Uncertainty Rating: High
- Morningstar Capital Allocation Rating: Standard
- Morningstar Economic Moat Rating: Wide
- Morningstar Style Box: Small Growth
- Industry: Other Industrial Metals & Mining
Compass Minerals is the only wide-moat company on our list; the stock trades 48% below our $45 fair value estimate. The firm produces salt and specialty potash fertilizer, and its portfolio of cost-advantaged assets is “enviable,” according to Morningstar’s Goldstein—and they underpin the company’s wide moat rating. In January, Compass Minerals saw a change in CEO; we expect the leadership change to signal a renewed focus on cost reduction and drive free cash flow generation, says Goldstein.
FMC Corp
- Price/Fair Value: 0.52
- Morningstar Uncertainty Rating: High
- Morningstar Capital Allocation Rating: Standard
- Morningstar Economic Moat Rating: Narrow
- Morningstar Style Box: Small Core
- Industry: Agricultural Inputs
FMC Corp rounds out our list of some of the best small-cap stocks to buy. The stock trades 48% below our $110 fair value estimate. FMC is a pure-play crop chemical producer and one of the five largest patented crop protection companies globally. A pipeline of new premium products should allow FMC to continue producing new crop chemicals as older products roll off patent, says Morningstar’s Goldstein. The company has struggled of late: A slowdown from customer inventory destocking prompted two guidance cuts last year. “We view the current price as an excellent opportunity for long-term investors to pick up shares,” adds Goldstein.
What Do Morningstar’s Ratings Mean?
Here’s a rundown of the Morningstar ratings and metrics we considered when compiling the list of the top small-cap stocks to buy for the long term.
The Morningstar fair value estimate represents what Morningstar analysts think a particular stock is worth. Fair value estimates are rooted in the fundamentals and based on how much cash we think a company can generate in the future, not on fleeting metrics such as recent earnings or current stock price momentum.
The Morningstar Capital Allocation Rating is an assessment of how well a company manages its balance sheet, investments, and shareholders’ distributions. Analysts assign each company one of three ratings—Exemplary, Standard, or Poor—based on their assessments of how well a management team provides shareholder returns.
The Morningstar Economic Moat Rating gauges how likely a company is to keep competitors at bay for the foreseeable future. Companies that we expect to maintain their competitive edge for two decades or more are assigned a wide moat rating; those we expect to remain competitive for at least a decade earn a narrow moat rating; and those that have yet to carve out competitive advantages earn a moat rating of none.
The Morningstar Style Box is a nine-square grid that provides a graphical representation of the investment style of stocks, bonds, or funds. Based on a series of inputs—including a company’s historical and long-term projected growth and its historical and forward-looking price multiples—a stock is classified as either a value stock, a growth stock, or a core stock. A stock is also classified as either small-cap, mid-cap, or large-cap based on its market capitalization.
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How to Find More of the Best Small-Cap Stocks to Buy
Of course, there are many other criteria that investors can use to find small-cap stocks to buy for the long term. Here are some tools to find more ideas to research further:
- Investors can use the Morningstar Investor screener to create their own list of small-cap stocks that meet their specific criteria. Set the Investment Type to stocks, and then choose what market capitalization threshold you’d like in the Criteria section. You can then refine your search for small-cap stocks even further by adding valuation, profitability, and/or other requirements. You can also screen your list of small-cap stocks by Morningstar Rating or economic moat.
- Investors who’d rather invest in small-cap stocks through a managed product have a few tools at their disposal. Begin your research with a list of highly rated small-cap funds that’ve kept a lid on volatility. Or review our full lists of small-value funds, small-blend funds, or small-growth funds. More interested in exchange-traded funds? No problem: Peruse our lists of small-value ETFs, small-blend ETFs, or small-growth ETFs.
The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.
