11 small-cap stocks the analysts love for 2021

If you desire growth, then your sights should be set on small-cap stocks. These 11 have attracted the gaze of dozens of Wall Street's best minds.

  • By Dan Burrows,
  • Kiplinger
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Market strategists increasingly see 2021 as being the year of small-cap stocks.

That's because stocks with smaller market values tend to shine in the early part of the economic cycle, when sentiment is rising and investors are willing to accept more risk.

Independent broker-dealer LPL Financial does a good job of summarizing the bull case for small caps we're seeing from a raft of Wall Street strategists.

"We believe the latest recession is over and the new economic expansion has begun," says Jeff Buchbinder, equity strategist at LPL Financial. "Small caps tend to outperform large caps coming out of a recession and the greater economic sensitivity provided by small caps may be helpful when economic growth expectations go from bad to less bad, and eventually to good."

There's no official definition for small-cap stocks. While a popular rule of thumb puts them between $500 million and $2 billion in market valuation, stocks in the small-cap benchmark Russell 2000 (.RUT) have an average market value of $3.3 billion and a median value of $900,000.

Using the Russell 2000 as our universe, we went looking for analysts' top-rated small caps right now. 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.

We then limited ourselves to names followed by a minimum of 15 analysts and with at least 10 Strong Buy recommendations. And lastly, we dug into research, fundamental factors and analysts' estimates on the top-scoring names.

That led us to this list of the 11 best small-cap stocks for 2021, by virtue of their high analyst ratings and bullish outlooks. Read on as we analyze what makes each one stand out.

Data is as of Jan. 13. Companies are listed by strength of analysts' average rating, from lowest to highest. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.

BJ's Wholesale Club

  • Market value: $5.3 billion
  • Dividend yield: N/A
  • Analysts' average recommendation: 1.80

BJ's Wholesale Club (BJ) counts itself among the businesses that have actually benefited from the pandemic. Shares are up 67% over the past 52 weeks – vs. a 16% gain for the S&P 500 (.SPX) – and analysts see even more upside ahead.

By just Buys and Sells, BJ shares just barely made it into this group of 2021's best small-cap stocks. But the price potential is outstanding: Wall Street's average target price of $50.89 gives BJ implied upside of 33% over the next 12 months or so, according to S&P Global Market Intelligence.

William Blair's equity research team, which rates BJ at Outperform (equivalent of Buy), recently added the wholesale club to its Consumer Near-Term Focus List, citing continued momentum in the business and an attractive valuation.

"The pandemic has clearly changed consumer purchasing behaviors and will continue to do so for some time," William Blair says. "We believe BJ's is especially well positioned to capitalize on continued growth in eating at home, larger pack sizes, and one-stop shopping, particularly given the company's compelling value offering."

Farther out, the growth picture is likewise sanguine. Analysts expect BJ to generate average annual earnings growth of more than 14% over the next three to five years, according to S&P Global Market Intelligence. At the same time, this small-cap stock changes hands at just 12.6 times projected earnings for fiscal 2021, which makes for a compelling valuation.

II-VI

  • Market value: $9.1 billion
  • Dividend yield: N/A
  • Analysts' average recommendation: 1.70

II-VI (IIVI) manufacturers a wide variety of engineered materials and optoelectronic components, such as semiconductors and industrial lasers used by industries ranging from telecommunications to defense contractors.

The rollout of 5G wireless networks and growth of data centers to support cloud computing are just two of the tailwinds boosting results. Analysts expect those cyclical trends to extend through 2021, thanks to rising global economic growth, an expanding digital economy and lean inventory.

Bank of America Global Research, which initiated coverage on the name in October with a Buy rating, says II-VI is "uniquely exposed to growth areas in communications, 5G, electric vehicles, mobile 3D sensing that includes the iPhone, and the aerospace and defense markets."

Shares are up 137% over the past 52 weeks, but most of the Street says they still have room to run. Of the 20 analysts covering the stock tracked by S&P Global Market Intelligence, 11 rate it at Strong Buy and four say Buy. The remaining five analysts call it a Hold.

Profit growth should keep IIVI among the market's best small-cap stocks for 2021. Estimates for average annual earnings growth sit at nearly 17% over the next three to five years.

QTS Realty Trust

  • Market value: $3.9 billion
  • Dividend yield: 3.1%
  • Analysts' average recommendation: 1.58

QTS Realty Trust (QTS), a real estate investment trust (REIT), is a data center facilities company that stands to benefit from some of the same trends boosting II-VI, including continued momentum in networking and cloud computing.

It's a crowded field, to be sure, but Mizuho Securities says QTS has some strategic advantages, including its unique platform.

"QTS is increasingly focused on using Data Center as a Service (DCaaS) to distinguish its platform, gain market share and charge premium prices for value added services," says Mizuho, which rates shares at Buy.

"The ease of remote access/monitoring has been a major point of differentiation amidst the pandemic, and in some cases has resulted in market share gains," Mizuho adds. "The addition of further capabilities will continue to provide an edge for QTS in the increasingly competitive data center landscape."

Mizuho is very much in the majority when it comes to the Street's recommendations. Of the analysts tracked by S&P Global Market Intelligence, 10 rate the small-cap REIT at Strong Buy and seven say Buy. Two analysts call it a Hold.

Their average target price of $75.53 gives the stock implied upside of 25% in the next year or so. That doesn't include its income potential. While most of the best small-cap stocks for 2021 are pure growth plays, QTS offers dividends; its 3.1% yield is roughly double the rate on the S&P 500.

LivePerson

  • Market value: $4.3 billion
  • Dividend yield: N/A
  • Analysts' average recommendation: 1.56

LivePerson (LPSN) is another stock getting a lift from the pandemic, as live chat and artificial intelligence have become central to the way home-bound consumers communicate with companies.

"LPSN has established a leading position in the conversational commerce market for customer care," say B. Riley analysts, who rate the stock at Buy. "We believe the recent momentum is sustainable in fiscal 2021 and beyond as LPSN stands to benefit from the seemingly permanent structural shift toward conversational artificial intelligence as a preferred means of communicating with brands."

LPSN helped pioneer live chat in the 1990s and eventually became the dominant player with about 35% market share. But several years ago, the company saw a much larger opportunity in customer service. LivePerson's LiveEngage software platform allows consumers to message with brands through WhatsApp, iOS Messages, Facebook Messenger, websites or smartphone apps.

Analysts expect LPSN to deliver robust average annual earnings growth of 25% over the next three to five years, according to S&P Global Market Intelligence.

Nevro

  • Market value: $6.1 billion
  • Dividend yield: N/A
  • Analysts' average recommendation: 1.53

Shares in Nevro (NVRO) stumbled recently after the medical devices company issued some disappointing preliminary fourth-quarter results and took a shot from a short seller.

COVID-19 led to declines in U.S. clinical trials and revenue in the fourth quarter. Meanwhile, Scorpion Capital announced a short position in the stock on Jan. 7, alleging that the company engages in fraudulent practices regarding its spinal cord stimulation devices.

And yet, the analysts covering the company remain unmoved.

The 15 analysts tracked by S&P Global Market Intelligence are almost entirely behind the bull case, with 10 Strong Buys, two Buys and two Holds. But NVRO does stand out among the pros' best small-cap stocks for 2021 because of its modest $189.75 average price target, which implies just 8% upside from current prices.

Investors should watch the analyst community closely to see whether the pros move their price targets higher if NVRO hits their current mark. For instance, Wells Fargo recently bumped up its PT to a Street-high $215 per share.

Or, perhaps just wait for better prices. Baird, which has the stock at Outperform, says the Scorpion report could sting shares for a while. UBS rates the stock at Neutral, saying the stock looks fairly valued at current levels.

Either way, smaller biomedical device companies like NVRO are best left to investors who understand they come with high speculative risk.

Papa John's International

  • Market value: $3.1 billion
  • Dividend yield: 1.0%
  • Analysts' average recommendation: 1.50

Papa John's International (PZZA) rose by more than a third in 2020, and analysts expect the new year to bring even more market-beating returns.

CFRA Research, which upgraded this small-cap stock to Buy in November, applauds the way PZZA has taken advantage of the pandemic-led surge in demand for pizza delivery.

"Having now substantially reopened its North America restaurants and international franchise restaurants amid the Covid-19 disruption, PZZA has successfully, in our view, pivoted to off-premises business, with strong growth in its digital channels (riding on third-party delivery)," CFRA says.

The Street expects the company's investments in digital initiatives and product innovation to fuel outsized profit growth for some time. Analysts polled by S&P Global Market Intelligence forecast average annual earnings growth of more than 28% for the next three to five years.

There are 11 Strong Buy recommendations on the stock and two Buy calls, per S&P Global Market Intelligence. Three analysts rate PZZA at Hold.

PDC Energy

  • Market value: $2.5 billion
  • Dividend yield: N/A
  • Analysts' average recommendation: 1.47

Energy stocks have been slammed by the global economic slowdown resulting from the spread of COVID-19, which makes PDC Energy's (PDCE) recent stock performance all the more remarkable.

Shares in the independent oil and gas driller are off only 5% over the past year, versus a decline of 28% for the S&P 500 energy sector. That outperformance has continued apace in 2021, as PDCE is up 19% for the year-to-date vs. the energy sector's 14% gain.

Some analysts, such as CFRA Research, base their Buy calls in part on PDC Energy's attractiveness as an acquisition target. Others point to fundamentals, such as its operations located predominantly located in Colorado and Texas, as well as its financial stability.

"In our view, PDCE offers investors a compelling asset mix between the Delaware Basin and Niobrara Shale in the DJ Basin with a resilient asset base and a top tier balance sheet," says Stifel, which rates the stock at Buy.

Of the 17 analysts tracked by S&P Global Market Intelligence covering the stock, 11 rate it at Strong Buy, four say Buy and two call it a Hold.

Chart Industries

  • Market value: $4.8 billion
  • Dividend yield: N/A
  • Analysts' average recommendation: 1.47

Shares in Chart Industries (GTLS), which manufactures cryogenic equipment for industrial gasses such as liquid natural gas (LNG), is riding the global secular trend toward sustainable energy.

The market certainly likes GTLS' commitment to greener energy. The stock has roughly doubled over the past 52 weeks, and analysts expect a torrid pace of profit growth over the next few years to help keep shares rising. The Street is forecasting average annual earnings growth of 33% over the next three to five years.

Analysts say the company's unique portfolio of technologies gives it an edge in a growing industry. To the end, they applauded its $20 million acquisition Sustainable Energy Solutions in December because it bolsters the company's carbon capture capabilities.

"In the context of the decarbonization megatrend, Chart is a one-of-a-kind play on the global shift to more gas-centric economies," say Raymond James equity research analysts. "There is upside potential from large liquid natural gas projects. Notwithstanding the lingering headwinds from the North American energy sector, we reiterate our Outperform rating."

Fate Therapeutics

  • Market value: $10.3 billion
  • Dividend yield: N/A
  • Analysts' average recommendation: 1.40

Shares in Fate Therapeutics (FATE) blasted off in the fourth quarter of 2020, and that momentum is expected to continue in 2021, analysts say.

To get a sense of the sentiment on this biopharmaceutical firm, have a look at the recent tape. FATE shares are up 131% over the past three months versus 8.5% for the S&P 500. And its 365% return in 2020 made it one of the best small-cap stocks of last year.

The firm is developing a pipeline of immuno-oncology therapies, and results from clinical trials thus far have greatly impressed analysts and investors alike. The bull case is that future readouts from trials of its cancer-killer FT596 will further fuel the stock's ballistic trajectory.

"We rate FATE shares Buy," Stifel says. "While we've only seen limited data for FT596, we continue to be bullish on prospects for efficacy as many of its features have, at least individually, been shown to be active. Our positive thesis is predicated on our belief that future FT596 updates will be positive, and in turn be positive catalysts for shares."

Of the 15 analysts covering the stock tracked by S&P Global Market Intelligence, 11 rate it at Strong Buy, two have it at Buy and two call it a hold.

Health Catalyst

  • Market value: $2.0 billion
  • Dividend yield: N/A
  • Analysts' average recommendation: 1.21

Health Catalyst (HCAT) is a software-as-a-service company that provides a cloud-based data platform, analytics software and professional services for hospitals and other healthcare organizations. The idea is that a partnership with HCAT can help healthcare providers improve patient outcomes.

Although the stock has been a market laggard since going public in the summer of 2019, it sure has been frisky of late, rising by more than a third over the past three months.

Canaccord Genuity has HCAT as one of its top healthcare IT stocks for 2021. Shares might look pricey compared with those of its sector peers, but Canaccord says they're worth it.

"We believe a premium valuation is justified for Health Catalyst as it provides 'next generation' analytics to customers," says Canaccord, which rates the stock at Buy. "Furthermore, we are expecting HCAT to generate revenue growth of 22% and 21% in 2021 and 2022, respectively, while its peer group is expected to generate average revenue growth of 9% in each of those years, or less than half of HCAT's estimated growth rate."

Of the 14 analysts covering the stock tracked by S&P Global Market Intelligence, 11 call it a Strong Buy and three have it at Buy.

Golar LNG

  • Market value: $1.4 billion
  • Dividend yield: N/A
  • Analysts' average recommendation: 1.08

We would hope that the analyst community considers Golar LNG (GLNG) among its best small-cap stocks for 2021. After all, we recently called it one of the best energy stocks for the year to come.

Stifel, which rates this liquid natural gas play at Buy, says the company is seizing the opportunity afforded by the secular growth trend in LNG amid increased demand for cleaner energy.

"Golar is in the process of transforming from a traditional provider of LNG transportation and floating regasification solutions to becoming a fully integrated leader in every segment of the LNG supply chain: liquefaction, transportation, and regasification, including power plant generation," Stifel says.

Shares are down 14% over the past 52 weeks, partly due to the company selling an additional 11 million shares late last year. More importantly for recent investors, however, is the fact that GLNG has rallied by nearly 80% over the past three months.

And they think it still has more steam. Of the 12 analysts covering GLNG tracked by S&P Global Market Intelligence, 11 call it a Strong Buy and one rates it at Buy. Their average target price of $15.25 gives Golar implied upside of about 21% over the next 12 months or so.

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© 2021 The Kiplinger Washington Editors, Inc.
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