Why You Should Buy Small-Caps Stocks Now

These equities have trailed larger companies all year. Stocks of smaller companies are up about 12%. That’s not bad, honestly. But it’s also not good when compared to the S&P 500, which is up roughly 25%.

However, that could all change soon.

Today, I’ll show you how the tide is about to turn and why you should buy small-cap stocks now. Then, I’ll show you one top small-cap stock that has delivered big-time returns for years.

Falling Rates, Low Valuations, and Cyclical Rotation

It’s clear that Treasury yields are pulling back after a big run-up.

That’s great for small-cap stocks because they stimulate economic growth. Small companies carry more debt than big firms and pay higher interest rates on those loans.

So, falling rates are music to small companies’ ears. No wonder there’s a negative correlation between the 10-year Treasury yield and small-cap stock performance:

Also, small-cap stocks are cheaper compared to the S&P 500. Since 1995, small stocks delivered a 3% valuation premium on average because of their higher long-term returns.

Currently, small-cap stocks trade at a 27% discount relative to the S&P 500. They’ve rarely been cheaper. As this chart shows, small-cap stocks have room to grow:

Finally, industrial sectors are rotating right now. New sectors – namely energy, financials, and industrials – are leading the way and driving the gains:

Here’s why that matters: small-cap indices like the Russell 2000 and the S&P SmallCap 600 are full of cyclical stocks.

Notice how financials and industrials make up nearly 50% of the S&P SmallCap 600 compared to less than 25% of the S&P 500:

All in all, the macro backdrop favors unloved small-cap stocks. Falling rates, low valuations, and cyclical rotation point to big gains on the horizon.

Opportunity is Ahead

Now let me show you a small-cap stock identified in MAPsignals data that has thrived on favorable cyclical conditions, strong earnings, and Big Money inflows.

Core & Main, Inc. (CNM) distributes water, sewer, and fire protection products. This industrials stock is a Big Money favorite.

CNM is up 48% in 2024 and has shown strong sales and earnings growth:

• 3-year sales growth rate (+23.7%)
• 3-year earnings growth rate (+124.6%)

Source: FactSet

It’s been under Big Money demand for a year. Each green bar signals unusual inflows:

CNM made the rare Top 20 report 10 times in a year. The blue bars below shows when it was a top pick:

And this is just one company that could flourish as the tide turns for small-cap stocks. Even with CNM’s big gains, there could be more room to grow.

Add it all up, and the stage is set for small-cap wins. Macro conditions show how opportunity is ahead. Follow the Big Money flows with MAPsignals to learn more.

Disclosure: the author holds no position in CNM at the time of publication.