Investing in small-cap stocks and funds can be gratifying, but it also has risks that investors must be aware of. So here are our recommendations for several of the best small-cap stocks and funds to add to your portfolio.

Best small-cap stocks

As we discussed yesterday, a small-cap company is one whose market capitalization (i.e. share price times the number of shares outstanding) is relatively small. You may not recognize these companies, but they might still be worth your investment. (NASDAQ:PRTS), which used to be known as U.S. Auto Parts, is an online auto retailer that has seen a lot of changes in recent years. The company has been working on consolidating its web brands under the CarParts banner.

This consolidation seemed to pay off when sales surged during the COVID-19 pandemic. In addition, CarParts is continuing to invest in technology and marketing and rapidly adding new distribution centers across the country. Currently, 80% of Americans can receive orders from Carparts within two days.

The e-commerce company’s opportunities for growth look promising due to a recent global semiconductor shortage. This shortage has caused new and used car prices to rise, which this company views as a potential market. In the long term, they target 20%-25% revenue growth and 8%-10% adjusted EBITDA. That means their stock could be worth even more than it is now.

ACM Research

ACM Research (NASDAQ:ACMR), as a “picks-and-shovels” play in the semiconductor business, is a manufacturer of cleaning equipment for semiconductor chips. Investing in ACM Research exposes you to a fast-growing market without the danger of commodity chip prices decreasing.

ACM is a U.S.-based company that does most of its dealings in China, making it less risky for investors to get involved with the Chinese market. In addition, ACM is one of the few small-cap companies offering both large growth potential and strong profitability.

Perion Network

During the pandemic, ad tech stocks have skyrocketed alongside broad gains in digital advertising and connected TV. An Israeli firm called Perion Network (NASDAQ:PERI) specializes in linking advertisers and publishers through its smart hub. This makes it a one-of-a-kind product in an industry where firms generally cater to brands or publishers.
Perion is a company with good connections, as it’s a close partner with Microsoft (NASDAQ:MSFT). In fact, Perion is helping Microsoft make money from its Bing search engine.

Perion has been growing by acquiring other companies and establishing a position in premium ads. It offers features including QR scans, customizable backgrounds, and in-game ads during sports events. The company projects to grow 42% in 2021 and 29% growth the following year. Similarly to ACM Research, Perion is also profitable.

Best small-cap funds

If you don’t want to put all your eggs in one basket by choosing individual small-cap stocks, investing in a small-cap ETF or mutual fund can give you more diverse exposure. Here are a couple of great options:

  • iShares Russell 2000 ETF (NYSE:IWM): The Russell 2000 is the most popular index for small-cap stocks, and this ETF lets you invest in its performance. The annual management fee is 0.19%, which means that if you invested $1,000, it would cost you $1.90 per year.
  • Fidelity Small Cap Growth Fund (MUTF:FCPGX): This mutual fund invests in small-cap stocks with high growth potential. It’s actively managed, meaning its objective is to outperform the Russell 2000 benchmark. Additionally, the fund has actual human portfolio managers and analysts taking care of the fund. As a result, the fund’s 0.94% annual fees are somewhat high compared to most ETFs.
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