Potential in Small-Cap Stocks: Exploring Three Promising Opportunities

Though many investors prefer large, recognizable companies, small-cap stocks can provide unique chances for growth. Despite their greater price fluctuations, these smaller firms can offer bigger returns for those willing to take a long-term view.

Small-cap companies often thrive in emerging markets, allowing them to expand quickly and gain market share. This potential for rapid growth, paired with lower market capitalizations, can result in significant stock price increases over time.

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Here are three small-cap stocks primed to outperform the benchmark S&P 500 over the next five years.

Leading the Charge in Clean Consumer Goods

The Honest Company (NASDAQ: HNST) specializes in clean personal care products. Recent performance indicates growth, with second-quarter 2024 revenue climbing 10% to $93 million and gross margins improving from 27.1% to 38.3% year-over-year.

The Honest Company has achieved positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for three straight quarters. This success allowed management to increase its full-year revenue and profitability guidance.

Investors have noticed the improvements, with the stock price surging over 222% in the past year. Although the company is still in a turnaround phase, its current market cap of about $378 million appears modest within the multi-billion-dollar clean consumer products sector.

Innovator in Photonic Solutions

Poet Technologies (NASDAQ: POET) focuses on advanced photonic solutions for data communications and sensing applications, particularly for artificial intelligence (AI). This year, Poet’s stock has skyrocketed by 314% due to strategic partnerships and design successes.

A recent collaboration with Mitsubishi Electric aims to develop 3.2T optical engines for AI networks. Furthermore, Poet has secured key alliances with Foxconn Interconnect Technology and Luxshare Tech, enhancing its presence in the growing AI infrastructure market.

However, Poet Technologies is still in early commercialization, with limited revenue. The company faces stiff competition from established optical component firms and requires substantial funding to grow its operations.

Revolutionizing High-Performance Computing

Applied Digital (NASDAQ: APLD) is a leader in next-gen digital infrastructure focused on high-performance computing and AI. Its first-quarter fiscal 2025 showcased impressive growth with revenues of $60.7 million, reflecting a 67% increase year-over-year.

A $160 million private placement, featuring investment from Nvidia, has validated the company’s strategies. Applied Digital is expanding its cloud services and plans to build a 100-megawatt data center dedicated to AI applications.

Nonetheless, the company faces execution risks amid rapid scaling and needs considerable capital to build its infrastructure. Competition in the high-performance computing sector, particularly in AI, is also becoming more intense.

Wealth-Building Potential in Small-Cap Stocks

For long-term investors, small-cap stocks can present great growth opportunities. While these firms can yield higher returns than larger companies or the S&P 500, they also carry more volatility and execution risks.

These three companies show promising market positions and recent successes, but they require careful portfolio management. Their early developmental stages and capital needs make them more fitting for investors with a higher risk tolerance and a long-term outlook.

Don’t Miss Out: A Second Chance at Growth

Concerned you missed the chance to invest in major stock successes? You’re in luck.

Occasionally, our expert analysts issue a “Double Down” stock recommendation for companies poised for growth. If you’re worried that you missed your opportunity to buy, now could be the best time to act. The numbers are compelling:

• Amazon: Investing $1,000 in 2010 would be worth $21,217!*
• Apple: A $1,000 investment in 2008 would be valued at $44,153!*
• Netflix: If you put in $1,000 back in 2004, it would have grown to $403,994!*

Currently, we are issuing “Double Down” alerts for three exceptional companies, and this might be your last chance for a while.

See 3 “Double Down” stocks »

*Stock Advisor returns as of October 28, 2024

George Budwell has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.