7 best small-cap stocks to buy for 2023 and beyond

Analysts say a tough 2022 has left these small-cap stocks priced for outperformance in the new year and beyond.

  • By DAN BURROWS,
  • Kiplinger
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Small-cap stocks tend to suffer more than their larger cap peers when equities are broadly struggling, and 2022 was no exception. But if there's a sliver of a silver lining to be found, it's that analysts say the best small-cap stocks to buy are priced for exceptional returns in 2023.

First, let's take a look at the 2022 tape: The small-cap benchmark Russell 2000 Index () generated a total return (price appreciation plus dividends) of -20.4% for the year-to-date through Dec. 16. That trailed the S&P 500's () total return of -17.9%.

No surprises there. Risker and "growthier" equities such as small-cap stocks tend to underperform when markets are headed south.

By the same token, however, small-cap stocks also tend to outperform the broader market when equities are catching a bid. No one can know for certain if we've already seen the bottom of our current bear market. Once the equity malaise lifts, however, the best small-cap stocks to buy should theoretically be among the market's top outperformers.

In order to get an idea of where these outsized potential returns might be hiding, we turned to Wall Street analysts to find the best small-cap stocks to buy for 2023. To that end, we screened the Russell 2000 for analysts' top-rated small-cap stocks.

Here's how the process works: S&P Global Market Intelligence surveys analysts' stock ratings and scores them on a five-point scale, where 1.0 equals Strong Buy and 5.0 means Strong Sell. Any score of 2.5 or lower means that analysts, on average, rate the stock a Buy. The closer the score gets to 1.0, the stronger the Buy call. In other words, lower scores are better than higher scores.

We further limited ourselves to stocks with at least 10 Strong Buy recommendations (in order to ensure adequate analyst coverage and sample size). Lastly, we dug into research, fundamental factors, valuation, analysts' estimates and other data on the top names.

The bottom line? Healthcare stocks – notably biotech and biopharmaceutical firms – dominate the list, but at least one name might surprise you.

Read on to see Wall Street's seven best small-cap stocks to buy for 2023 and beyond.

Analysts' consensus recommendations, courtesy of S&P Global Market Intelligence, are as of Dec. 19, 2022. Share prices, market capitalizations and other data are as of Dec. 16, unless otherwise noted.

7. Fate Therapeutics

  • Market value: $1.27 billion
  • Analysts' consensus recommendation: 1.57 (Buy)

Biotech stocks held up well in an otherwise terrible 2022. Indeed, the benchmark Nasdaq Biotechnology Index () was off 10% for the year-to-date through mid-December. That's downright defensive compared to the broader market's loss of 19% over the same span.

Alas, shares in a number of small-cap biotechs, such as Fate Therapeutics (), did not go along for the ride. FATE is developing cell-based therapies to treat cancer. Although clinical trials thus far have impressed the Street, the stock lost more than three-quarters of its value in 2022.

That's how it sometimes goes with clinical-stage biotech stocks. The potential rewards are unusually high, but then so are the risks.

Happily for bulls, the Street believes future readouts from trials of FATE cancer-killers such as FT596 will fuel ballistic returns in the stock. With an average target price of $62.38, analysts give FATE implied price upside of more than 375% in the next year or so.

"We believe that data are supportive that FT596 is benefiting from multiple modes of anti-cancer activity and that clinical response rates will meet the high bar set by autologous CAR-T," writes Stifel analyst Benjamin Burnett (Buy).

Of the 23 analysts covering FATE tracked by S&P Global Market Intelligence, 15 call it a Strong Buy, four say Buy, three have it at Hold and one says Sell. That works out to a consensus recommendation of Buy, with high conviction to boot. As such, FATE easily makes the list of analysts' best small-cap stocks to buy for 2023.

6. Arvinas

  • Market value: $1.92 billion
  • Analysts' consensus recommendation: 1.55 (Buy)

Arvinas () is a clinical-stage biopharmaceutical company that creates specialized therapies for the treatment of certain cancers. Shares lost 56% of their value for the year-to-date through mid-December, but analysts say that just makes them priced for massive gains next year.

Oppenheimer analyst Mark Breidenbach rates shares at Outperform (the equivalent of Buy), applauding the company's development of a class of targeted therapeutics called PROTACs, which are designed to degrade disease-causing proteins.

"Our Outperform rating on Arvinas in part reflects our conviction that both ARV-110 and ARV-471 [PROTACS] could receive regulatory approvals in late-line relapsed/refractory settings by 2024 with future label expansion opportunities into earlier settings," Breidenbach writes. "We believe the company's pipeline has a substantial market opportunity, particularly ARV-471, which has shown compelling early activity in heavily pretreated breast cancer."

Of the 22 analysts covering ARVN tracked by S&P Global Market Intelligence, 13 rate it a Strong Buy, six say Buy and three have it at Hold. What should really capture the attention of investors seeking out the best small-cap stocks, however, is the Street's average target price.

At $83.62, analysts collectively give ARVN implied upside of more than 130% in the next 12 months or so. That sort of potential return helps explain why ARVN makes any list of the best small-cap stocks to buy for 2023.

5. Chart Industries

  • Market value: $4.27 billion
  • Analysts' consensus recommendation: 1.53 (Buy)

Chart Industries () is the only name on our list from outside the healthcare sector. It was having a terrific 2022 until early November, but then management broke a bit of news. The company announced a rather ambitious acquisition, and shares immediately took a dive.

Chart Industries manufactures cryogenic equipment for industrial gasses such as liquefied natural gas (LNG) and hydrogen. Over the longer term, LNG gives GTLS investors exposure to the global secular trend toward sustainable energy. Shorter term, shares were benefitting from LNG investment spurred by Russia's invasion of Ukraine.

GTLS stock peaked with a 50% year-to-date gain as of Nov. 8. And then the bottom fell out. On Nov. 9, management announced its $4.4 billion acquisition of Howden, an air and gas services provider, from a private equity group. Worries about the debt financing and dilution required to fund the deal instantly clobbered the stock. By late December, GTLS had lost more than a quarter of its value in 2022.

The Street, however, says the steep selloff in GTLS stock affords investors an opportunity to get a high-quality name on deep discount.

"We see value in GTLS shares now trading about 50% below their pre-deal price," writes Jefferies analyst Sam Burwell (Buy). "The Howden deal does increase risk, but given the large drop in share price, we believe risk/reward is compelling."

Jefferies is in the majority on the Street, where 11 analysts rate GTLS stock at Strong Buy and four call it a Buy. Analysts' average price target of $200.64 gives the stock implied upside of about 72% in the next year.

4. Denali Therapeutics

  • Market value: $3.90 billion
  • Analysts' consensus recommendation: 1.47 (Strong Buy)

Denali Therapeutics () stock lost a third of its value in 2022, but that just has shares in this biotech springloaded for outsized returns in the year ahead, analysts say.

"We view DNLI as an emerging leader in neurodegenerative diseases and central nervous system (CNS) lysosomal storage disorders with several late-stage development candidates based on novel and differentiated MOAs with strong data," writes Oppenheimer analyst Jay Olson, who rates the stock at Outperform.

Although the company threw investors for a loop when it announced a secondary offering in November (which dilutes existing shareholders), bulls say it's no dealbreaker on the name for 2023.

"We continue to see DNLI assembling one of the broadest CNS pipelines in the space," writes Wedbush analyst Laura Chico (Outperform). "The secondary offering, while not necessarily anticipated, does provide important access to capital at a time when the company can prepare for potential DNL310 commercialization."

Of the 17 analysts covering the stock tracked by S&P Global Market Intelligence, 11 rate DNLI at Strong Buy, four say Buy and two have it at Hold. Their average target price of $64.47 gives the stock implied upside of about 125% in the next 12 months or so. Little wonder, then, that DNLI makes the list of best small-cap stocks to buy for 2023 and beyond.

3. Axsome Therapeutics

  • Market value: $3.41 billion
  • Analysts' consensus recommendation: 1.40 (Strong Buy)

Analysts are amped that biotech firm Axsome Therapeutics () has a host of drugs in its pipeline set to power shares even higher next year and beyond.

True, AXSM more than doubled in 2022, helped by positive clinical readouts, but the stock has plenty more upside ahead.

Axsome's therapies in various stages of development include treatments for Alzheimer's disease, migraines and narcolepsy, among other illnesses. But it's the company's progress with AXS-05, a treatment for major depressive disorder that's set for expansion to indications, that has the Street in love with this small-cap stock.

Analysts are especially encouraged by AXS-05's clinical testing in treating Alzheimer's disease agitation.

"We view the results as impressive in a large indication where there are no currently approved chronic therapies," writes William Blair analyst Myles Minter, who rates AXSM at Outperform.

Although clinical-stage biotechs such as AXSM carry "significant investment risks," in the words of Truist Securities analyst Joon Lee (Buy), "AD agitation is a huge unmet need for which nothing is approved."

Such a large and untapped market has the Street highly bullish on this name. Of the 15 analysts covering AXSM tracked by S&P Global Market Intelligence, 12 call it a Strong Buy, one has it at Buy, one says Hold and one rates it at Sell. Meanwhile, their average target price of $110.08 gives shares implied upside of about 40% in 2023.

2. Karuna Therapeutics

  • Market value: $6.77 billion
  • Analysts' consensus recommendation: 1.32 (Strong Buy)

Karuna Therapeutics () is another high-risk, high-reward clinical-stage biopharmaceutical stock that's primed for even more outperformance after putting up big returns in 2022.

Karuna develops novel neuroscience drugs targeting diseases such as schizophrenia, psychosis and dementia. But the bull case at the moment hinges on the firm's success of its KarXT therapy for schizophrenia, and then expanding it to other indications.

KarXT could generate more than $1 billion in U.S. schizophrenia sales, notes Stifel analyst Paul Matteis (Buy), and if it succeeds in Alzheimer's Disease Psychosis, "it could easily add another $1 billion to $2 billion in peak revenue potential," the analyst writes.

Oppenheimer analyst Jay Olson (Outperform) is also a big believer in the name. The analyst calls KRTX a leader in schizophrenia and neuropsychiatric disorders, with KarXT offering "potential superiority over currently available antipsychotics."

True, clinical-stage biotech stocks are speculative, but analysts love Karuna's chances. Of the 19 analysts covering KRTX tracked by S&P Global Market Intelligence, 13 rate it at Strong Buy and six call it a Buy.

Shares gained more than 50% for the year-to-date through Dec. 16, and yet the Street says they have more room to run. With an average price target of $290.39, analysts give KRTX stock implied upside of about 45% in 2023.

1. Rocket Pharmaceuticals

  • Market value: $1.75 billion
  • Analysts' consensus recommendation: 1.20 (Strong Buy)

Rocket Pharmaceuticals () is another small-cap biotech with promising drugs under development, and it currently tops the list of Wall Street's favorite small-cap stocks to buy now.

Indeed, with a consensus recommendation score of 1.20, RCKT is a high-conviction Strong Buy. As with all such stocks in its sector, caution is warranted. Names like RCKT are speculative, lest we forget.

Regardless, analysts are plenty bullish on the name, which focuses on developing gene therapies for rare and devastating pediatric diseases.

"Rocket is a pioneer in the development of both ex vivo lentivirus-based and in vivo adeno-associated (AAV) based therapies," writes Needham analyst Gil Blum (Buy). "We think RP-A501, an AAV9 based gene therapy for Danon disease, will become a major value driver due to the size of the indication and lack of available therapy."

At William Blair, analyst Raju Prasad (Outperform) says Rocket is taking a "sound strategic approach," and is headed in the right direction to successfully tackle its ambitious goals.

"Further continuation in this strategic direction could unlock significant value creation for the company," Prasad adds.

Of the 15 analysts covering RCKT tracked by S&P Global Market Intelligence, 12 rate it at Strong Buy and three call it a Buy. Shares were up about 2% for the year-to-date through Dec. 16, and with an average price target of $52.46, the Street expects them to more than double in 2023. That's the kind of potential return investors should expect from the best small-cap stocks to buy for 2023.

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