Last Updated on: 22nd November 2023, 04:11 pm

The small-cap market can be very rewarding for a diligent investor. As a volatile market, small-caps tend to carry a high risk of investment. 

Small-caps tend to be newer companies that don’t have an established history. This often leaves them to be under-reported, under-analyzed, and thus undervalued. 

The lack of reporting on small-caps means there’s typically less competition, as most investors will lean on larger companies, where there is plenty to read up on.

However, small-caps have been gaining more momentum as of late. The reason some people love to invest in small-caps is that they are also known for producing higher returns. 

In comparison to large-cap and mega-cap companies, small-caps have been able to outperform them in periods following economic turmoil. 

Seeing how the world is in a time of economic recovery, it’s not hard to predict what the small-cap outlook for 2021 is going to look like.

Still, prior to any investment, you should do your research. This will help you avoid any start-ups that have flaw management or structure. 

Despite being able to outperform large and mega-caps, small-caps have a large likelihood of going under. This is the Achilles heel of small-cap companies. 

Yet some of the smallest companies ended up as titans of the market, such as Amazon. Will you be the investor to discover the next diamond in the rough?

The only way to find out is by researching small-cap companies and the market as a whole. And what better place to do that than right here. 

Small-Cap Performance in 2020

As you know, 2020 was a volatile year for the stock market to say the least. But volatility is not always a bad thing. In fact, for small-cap investors, it can be very advantageous. 

After a rough start to the year, 2020 actually finished quite strong thanks to reopenings and vaccine announcements. This helped both small-cap and large-cap companies make the most of the remainder of the year.

However, if you look at popular indices, those in the S&P 500 didn’t have as good a year as the Russel 2000, a small-cap index. S&P 500 investors saw a 16.5% return while Russel 2000 investors saw a 20% return. 

With such a strong finish to 2020, it’s not hard to believe that small-caps performance will continue into 2021. After all, history has shown that small-caps tend to thrive in the early stages of economic recovery.

But you didn’t come here for a history lesson. Instead, let’s take a look at how the stock market performed so far in quarter one (Q1). 

Recapping Q1 Performance So Far 

The start of 2021 was a major step up from a few quarters ago. The end of the year rally seen by several sectors of the market helped make Q1 2021 impressive. 

Investors in large-cap indices saw increases in the following: the Dow at 7.8%, the S&P 500 at 5.8%, and the Nasdaq at 2.8%. 

Mid-cap investors in the S&P 400 saw it climb up to 13.1% during Q1 of 2021.

While most investors are only concerned about large-cap stocks and their accompanying indices, it was the small-caps that really stood out. 

Popular small-cap indices, the Russel 2000 and S&P 600, had returns of 12.4% and 17.9%, respectively

Wondering why you didn’t read about this before? Consider that the small-cap market isn’t nearly covered or analyzed enough because, well, it’s small. 

Yet, it’s clear that small-caps are capable of making a big splash in the market. 

Reopening the Economy 

So what has fostered these jumps in the market? As mentioned earlier, reopenings of the economy in the US and worldwide helped out. And certainly, vaccine announcements and distribution have returned confidence back to the market.

On top of those two key factors, stimulus bills here in the US have put more money in the hands of consumers. It also provided relief for businesses, especially small businesses, who were heavily impacted by the pandemic. 

Combining these factors has created the perfect storm for a strong economic comeback this year. Of course, that all depends on any new setbacks/shutdowns that could occur. 

Positive Outlook for Small-Caps in 2021

Based on how small-caps have performed so far and the various measures that have been taken to get world economies back on track, the small-cap outlook seems to be on a  positive track. 

With investor confidence swelling, small-caps have even more to gain. Since it’s generally thought that large and mega-cap companies are overvalued, investors are in search of a way to make more gains. 

This has led some investors, such as yourself, to research recent small-cap market performance. And as you have read in the above sections, the numbers look great.

Even in the event that the market as a whole is disrupted by shutdowns or some other event, small-cap companies have a history of making larger than expected returns. 

Small-Cap Value Takes Leadership Over Small Growth In 2021

Now that you have a better understanding of the small-cap outlook for 2021, you may be interested in investing in small-cap stocks. But should you go with value stocks or are you better off with growth stocks? 

As a refresher or for those who don’t already know, growth stocks represent companies that are predicted to outgrow the overall market over time. This prediction is based on the future potential value of that stock.

On the other hand, value stocks represent companies that are trading below their true value, which typically means they will yield a larger return. 

So, which stock is doing better so far in 2021? Taking a look at Vanguard Small-cap EFTs, the evidence speaks for itself. The Vanguard Small-Cap Growth ETF is down 0.28% since last year. Meanwhile the Vanguard Small-cap Value ETF is up 15.37% in the same time frame.

It’s clear which is superior right now. But it’s unclear for how long small-cap value stocks will be in the lead forever. That’s why it’s so important that you keep yourself up-to-date with the small-cap market. 

Keeping track of how your investments are performing will help you make better decisions going forward. 

Stock to Buy and Hold in 2021

Before you decide which small-cap stocks to invest in this year, remember the power of diversification. The below list of companies/sectors to buy and hold in may be sectors you are already invested in.

Instead of stacking up stocks in the same sector, you may be better off spreading your investment to sectors you’re not as invested in. This way, you spread out your risk and have the potential to make unexpected gains. 

Since the healthcare industry had so much spotlight during the height of the pandemic, it would make sense to invest in some of the smaller players in this sector. 

One of the companies in the healthcare sector that may be worth looking into is Health Catalyst. This company provides IT services for healthcare institutions. 

With several stimulus checks sent to millions of Americans, people have more money to spend on non-essentials. 

Clothing retailers, such as Citi Trends, a small-cap company, can benefit greatly from this stimulus. On top of that, Citi Trends has changed their management and are now focused on growth. 

Finally, and perhaps most significant sector,  is the construction industry. New stimulus spending aimed specifically at the US’s infrastructure will give construction companies a major boost. 

One particular company you may want to consider investing in is Construction Partners. This company is involved in road construction and maintenance. Due to its work on public infrastructure, it draws quite a bit of public funds. 

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