Over the past few decades, some of the best and highest-yielding investments have been made by investors who recognized the potential of small-cap stocks.
And that truism continues to ring true: The small and mid-cap sector has been running rings around its much bigger peer, with the Russell 2000 up 11.8% in the year-to-date compared with a 4.5% gain by the S&P 500.
Despite their higher potential for growth, investors have often ignored small-cap stocks simply because most investors are too focused on bigger and well-known cult stocks such as Amazon Inc. (NASDAQ:AMZN), Tesla Inc. (NASDAQ:TSLA), Netflix Inc. (NASDAQ:NFLX) and Apple Inc. (NASDAQ:AAPL). Indeed, the now well-worn playbook of investing in tech and popular FAANG stocks is a big reason why small-caps have lagged their bigger brethren over the past decade.
But here’s a big secret: Asset class performance has historically been mean-reverting, meaning that long periods of underperformance are frequently followed by equally long periods of outperformance.
This disinterest in small-caps has created rare opportunities to find strong companies that are worthy of your attention. Here are small-caps lying in the intersection of megatrends that could outperform over the coming years.
#1 Megatrend: EVs
Lately, investors can’t seem to get enough of EV companies, thanks in large part to the ESG boom as well as the continuing shift from fossil fuels to cleaner energy sources with lower emissions and carbon footprints.
The de facto leader of the space,TSLA, has been on a tear, surging nearly 804% over 12 months thanks to the EV maker’s incredible success in diverse markets. Tesla’s strong run has helped alleviate fears that low oil prices would act as a disincentive for people looking to make the switch from gas-burning vehicles to EVs.
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While Tesla remains a good pick, the smaller EV companies that are just getting started might offer the biggest returns down the road. These include companies such as:
- Electrameccanica Vehicles (NASDAQ:SOLO)--A Canadian designer and manufacturer of EVs, with its flagship, purpose-built, single-seat electric vehicle dubbed SOLO. Electrameccanica currently sports a share price of $5.50 and market cap of $612.2M.
- Kandi Technologies Group (NASDAQ:KNDI)--A China-based EV company involved in the development, production and distribution of EV products, EV parts and off-road vehicle products. KNDI has a market cap of $511.7M with shares trading at $6.91.
- Workhorse Group (NYSE:WKHS)--an Ohio-based company that designs and builds high-performance EVs and aircraft. WKHS sports a market cap of $2.1B and a share price of $16.07.
#2 Megatrend: Renewable energy
Just like the EV sector, renewable energy stocks have lately turned red-hot: Invesco WilderHill Clean Energy ETF (PBW), an ETF designed to track US-listed stocks in the Clean Energy sector, has returned 330% over the past 52 weeks thanks again to the unstoppable ESG momentum.
Renewables such as wind and solar have continued to post solid growth even during the pandemic thus proving the resilience of the sector. The sector has also been booming as the costs of renewables continue to fall thus making them competitive with fossil fuels.
Some of the top small-cap picks in the renewables sector include:
- Bloom Energy Corporation (NYSE:BE) - a California-based manufacturer of solid oxide fuel cells used in the production of electricity on-site. BE sports a market cap of $4.9B and a share price of $26.92.
- Renewable Energy Group Inc. (NASDAQ:REGI)-- an Iowa, renewable energy company engaged in the production of biofuels and renewable chemicals. GS has a market cap of $3.07B with shares trading at $68.19.
- Daqo New Energy Corp.(NASDAQ:DQ)--a Chinese company that manufactures monocrystalline silicon and polysilicon. DQ, a top pick in the Invesco WilderHill Clean Energy ETF (PBW), sports a market cap of $6.1B with shares changing hands at $80.04.
#3 Megatrend: Hydrogen Fuel Cells Like EV and renewable energy companies, stocks of hydrogen fuel cell manufacturers have been booming thanks to hydrogen power emerging as a good complement to renewable energy. Due to the intermittent nature of wind and solar in power generation, incorporating hydrogen helps to stabilize the power grid by providing a highly stable and predictable flow of electricity.
The EU has lately touted a hydrogen economy in its latest topline targets as an important aspect in fighting climate change and has set an ambitious goal to build 40GW of electrolyzers within its borders over the next decade.
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Unfortunately, the hydrogen fuel cell market is littered with microcaps on the lower end of the spectrum and mid-caps on the higher end and no small caps in-between. Nevertheless, some of the better picks here include:
- Plug Power Inc.(NASDAQ:PLUG)--perhaps the best-known among fuel cell companies, PlugPower has built a successful niche developing technology for forklifts where fueling times can be critical. PLUG features a market cap of $23B and a share price of $37.80.
- Ballard Power Systems (NASDAQ:BLDP)--manufactures fuel cells for forklifts, buses, and marine applications. BLDP has a market cap of $7.6B and share price of $24.73.
- Bloom Energy (NYSE:BE)--about a year ago, Bloom Energy announced that it had developed fuel cells that can run on hydrogen and generate zero-carbon electricity. The fuel cells can be deployed for backup power and microgrid applications.BLDP has a market cap of $4.9B and share price of $26.95.
- FuelCell Energy, Inc. (NASDAQ:FCEL)--based in Connecticut, FuelCell Energy designs, manufactures and operates fuel cell plants that run on biogas and natural gas with more than 50 plants across the globe. FCEL sports a market cap of $5.1B and a share price of $14.79.
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