A disappointing year for small-cap stocks has them poised for outsized returns in 2022, market strategists say.
Lost amid some of the euphoria surrounding the broader market just booking one of its best years ever is the fact that small caps as an asset class didn’t exactly go along for the ride.
To recap, the S&P 500 generated a total return (price appreciation plus dividends) of 28.7% for 2021. Meanwhile, the small-cap benchmark Russell 2000 index’s total return came to just 14.8% – or roughly half of what the broader market served up.
Small-cap stocks – or stocks with market values of roughly less than $2 billion – are supposed to outperform in an economic recovery, so it’s understandable if investors in this class are a bit more than disappointed.
The usual suspects of COVID-19 uncertainty, supply-chain snafus, inflationary pressures and expectations of interest-rate hikes were particularly hard on small caps. On the bright side, a year of underperformance has small-cap stocks priced to outperform in 2022 and beyond, the pros say.
“While large and mid caps trade at a 35% to 40% premium to history, small caps now trade in-line with history,” writes Jill Carey Hall, equity and quant strategist at BofA Securities. “Valuations today imply high-single-digit annualized returns for small caps over the next 10 years.”
Importantly, in addition to being “the least-expensive asset class,” adds Hall, small caps offer a greater degree of diversification than stocks with larger market values.
With small caps teed up for a better 2022, we turned to Wall Street analysts to find the best small-cap stocks to buy for the new year. 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.
We then limited ourselves to names with at least 10 Strong Buy recommendations. Lastly, we dug into research, fundamental factors, analysts’ estimates and other data on the top-scoring names.
The bottom line? Read on to see Wall Street’s 12 favorite small-cap stocks to buy now as 2022 kicks into gear.
Share prices, analysts’ consensus recommendations and other data are as of Jan. 4, courtesy of S&P Global Market Intelligence, YCharts and Refinitiv Stock Reports Plus, unless otherwise noted.
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12. Global Blood TherapeuticsGetty Images
Market value: $1.9 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.64 (Buy) Analysts see tremendous upside in shares of Global Blood Therapeutics (GBT, $29.33) in 2022. The biopharmaceutical company specializing in treatments for rare blood diseases has a potential hit on its hands and a promising development pipeline, bulls say.
Oxbryta, the company’s oral, once-daily treatment for sickle cell disease (SCD), was granted regulatory approval for use in patients as young as four years old in mid-December. Analysts see the pediatric label expansion as critical to driving broader uptake of the medication.
“We rate GBT Outperform [the equivalent of Buy] based on our assessment of the commercial potential of Oxbryta in sickle cell disease,” writes Oppenheimer analyst Mark Breidenbach in a note to clients.
Catalysts for GBT stock include the potential for regulatory approval of Oxbryta in Europe in the first half of 2022, the analyst adds, as well as the firm’s pipeline — notably its next-generation sickle hemoglobin polymerization inhibitor.
Optimism abounds on the Street, which gives GBT stock a consensus recommendation of Buy, with high conviction. Of the 22 analysts covering the biotech tracked by S&P Global Market Intelligence, 13 rate it at Strong Buy, four say Buy and five call it a Hold. Their average price target of $70.55 gives GBT implied upside of about 141% in 2022. That’s one of the biggest expected returns among our 12 best small-cap stocks for 2022.
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11. Varonis SystemsGetty Images
Market value: $5.0 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.60 (Buy) Varonis Systems (VRNS, $46.36), a data security and analytics software firm, protects unstructured data not stored in a database — an increasingly tasty target for hackers. But it’s the company’s transition away from selling software licenses to offering cloud-based subscriptions that makes the Street salivate over its prospects.
“We view Varonis as a textbook case where ‘more is more,'” writes Needham analyst Alex Henderson (Buy), “meaning new customers are buying more of the platform upfront, and then expanding their deployments more rapidly — demonstrating improved customer lifetime economics and the fruits of a more consumable platform.”
Over at Jefferies, analyst Brent Thill (Buy) says the fact that Varonis is “skating to where the puck is headed” gives it an advantage over competitors.
“VRNS understands the threat landscape is evolving from traditional file systems to newer cloud/software-as-a-service apps and is working to position itself to defend customer data wherever it resides,” Thill writes. “VRNS remains one of the most unique value propositions in cybersecurity.”
The Street’s consensus recommendation stands at Buy, with high conviction. Eleven analysts rate VRNS at Strong Buy, six say Buy and three call it a Hold. Their average target price of $73.37 gives shares implied upside of more than 50% for 2022.
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10. Apellis PharmaceuticalsGetty Images
Market value: $4.6 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.56 (Buy) Analysts say Apellis Pharmaceuticals (APLS, $47.55) has a potential blockbuster drug on its hands that could drive years of market-beating returns.
The biopharmaceutical firm is already seeing success with Empaveli (pegcetacoplan) as a treatment for a rare blood disease called paroxysmal nocturnal hemoglobinuria (PNH). But the really big upside resides in the potential for regulatory approval of pegcetacoplan for geographic atrophy (GA), a macular degenerative eye disease.
“We view paroxysmal nocturnal hemoglobinuria as a near-term opportunity but believe success in geographic atrophy will be the long-term value driver for the stock,” writes Needham analyst Joseph Stringer (Buy). “We believe pegcetacoplan has blockbuster potential in GA, and estimate worldwide peak sales of approximately $3.8 billion in 2035.”
To put that top-line opportunity in context, analysts forecast APLS to generate just $130.7 million in revenue in 2022. Apellis is expected to file for regulatory approval for pegcetacoplan as a treatment for GA in the first half of the new year.
Nearly a dozen pros have APLS among their best small-cap stocks to buy for 2022. Of the 18 analysts covering Apellis tracked by S&P Global Market Intelligence, 11 rate it at Strong Buy. Another four say it’s a Buy, and just three call it a Hold. Their average price target of $70.18 gives the stock implied upside of about 48% in 2022.
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9. Axsome TherapeuticsGetty Images
Market value: $1.4 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.53 (Buy) Analysts are amped that biotech firm Axsome Therapeutics (AXSM, $35.91) has a host of drugs in its pipeline set to power shares higher in 2022 and beyond.
Axsome’s therapies in various stages of development include treatments for migraines, Alzheimer’s disease agitation and narcolepsy, among other illnesses. But it’s the company’s progress with a treatment for major depressive disorder that has the Street in love with this stock.
Analysts are optimistic that Axsome’s highly promising AXS-05 drug therapy could be given the green light for sale and marketing before too long.
“We rate shares of Axsome at Outperform, based on net present value assumptions for AXS-05 in depression, Alzheimer’s disease agitation and smoking cessation; AXS-07 in migraine; and AXS-12 in narcolepsy,” writes William Blair analyst Myles Minter. “We view AXS-05 as a best-in-class dextromethorphan-based therapy.”
Although Axsome is awaiting Food and Drug Administration approval of AXS-05 for major depressive disorder, analysts are confident it’s coming before too long. That’s why the Street gives the stock a consensus recommendation just shy of Strong Buy.
Eleven analysts rate AXSM at Strong Buy, one says Buy, two rate it at Hold and one calls it a Sell. The Street’s average target price of $86.61 gives shares implied upside of about 140% in 2022.
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8. Fate TherapeuticsGetty Images
Market value: $5.3 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.45 (Strong Buy) Fate Therapeutics (FATE, $55.94) is the first of our small-cap stocks to receive a consensus recommendation of Strong Buy. The biotech is developing a pipeline of immuno-oncology therapies, and results from clinical trials thus far have greatly impressed analysts and investors alike.
Indeed, some promising clinical updates prompted Wedbush analyst David Nierengarten to upgrade FATE to Outperform (Buy) from Neutral (Hold) in mid-December.
The bull case is that future readouts from trials of its cancer-killer FT596 will fuel ballistic returns in FATE shares.
“We rate FATE shares Buy,” writes Stifel analyst Benjamin Burnett. “Our positive thesis is predicated on our belief that future FT596 updates will be positive, and in turn be positive catalysts for shares. We also believe the company’s multiple myeloma opportunities will further drive enthusiasm for the platform while diversifying the company’s opportunity set within oncology.”
The Street also likes the fact that as of Sept. 30, the company has cash and cash equivalents of $678.7 million vs. just $104.4 million in long-term debt.
Of the 20 analysts covering FATE tracked by S&P Global Market Intelligence, 14 rate it at Strong Buy, three have it at Buy and three call it a Hold. Their average target price of $101.32 gives shares implied upside of about 80% in 2022.
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7. Sunnova Energy InternationalGetty Images
Market value: $3.0 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.41 (Strong Buy) Sunnova Energy (NOVA, $26.70) isn’t just one of the Street’s favorite small-cap stocks; it’s also one of the best utility stocks to buy for 2022.
Be aware, however, that NOVA isn’t your typical utility play. For one thing, it doesn’t pay a dividend. That’s highly unusual in a sector best known for equity income. Furthermore, the company isn’t expected to generate a full-year of operating profit until fiscal 2023.
What makes Sunnova stand out in the eyes of analysts — who give it a consensus recommendation of Strong Buy — is its dominant residential solar energy business.
The company installs and services solar cells on U.S. homes, and currently operates a network of more than 175,000 customers across 33 states and territories. This infrastructure collectively generates more than 900 megawatts of energy.
B. Riley analyst Christopher Souther (Buy) calls NOVA a “top idea” for 2022, noting that its “dealer model provides flexibility” because the company “doesn’t have the same fixed costs as its competitors.”
Over at BMO Capital Markets, analyst Ameet Thakkar rates shares in Sunnova at Outperform, and recommends buying the stock on any weakness.
Of the 17 analysts covering NOVA tracked by S&P Global Market Intelligence, 10 rate it at Strong Buy and seven call it a Buy. Their average target price of $56.76 gives shares implied upside of roughly 112% in 2022.
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6. CourseraGetty Images
Market value: $3.5 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.40 (Strong Buy) Virtual classrooms became a key feature of pandemic life, and that bodes well for Coursera (COUR, $25.00) even in a post-COVID-19 world, analysts say.
Coursera, which operates an online educational content platform, went public in March 2021. Shares are off more than 45% from their initial closing price. Partly that’s a function of the company lapping tough year-over-year comparisons against peak pandemic in 2020.
But bulls say the pullback affords investors in small-cap stocks a chance to participate in a transformative company at a reasonable price. The pandemic changed the marketplace for online education, the thesis goes, and COUR is uniquely set up to benefit.
“Coursera is the leading platform for online adult education content, with approximately 87 million highly engaged learners and more than 200 leading content partners,” writes Stifel analyst Scott Devitt (Buy). “We are constructive on shares of Coursera given the size of the opportunity ($2.6 trillion in adult education expenditure), attractive long-term margins, and the company’s leading competitive position.”
Devitt is very much in the majority on the Street, which gives the stock a consensus recommendation of Strong Buy. Ten analysts rate COUR at Strong Buy, four call it a Hold and one says Sell. Their average price target of $49.43 implies the share price will roughly double in the new year.
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5. PDC EnergyGetty Image
Market value: $5.4 billionDividend yield: 0.9%Analysts’ consensus recommendation: 1.40 (Strong Buy) Crude oil prices posted their biggest annual gain since 2009 last year, and analysts remain bullish on the oil and gas sector as a continuing recovery play for 2022.
That’s good news for the energy sector as a whole, and for PDC Energy (PDCE, $55.40), in particular. Indeed, few oil and gas stocks at any market cap get a bigger thumbs up from Wall Street analysts.
The independent exploration and production company scores a high-conviction Strong Buy consensus recommendation from 15 analysts, according to S&P Global Market Intelligence. That breaks down to 10 Strong Buy calls, four Buy ratings and one Hold. Meanwhile, their average price target of $70.47 gives PDCE implied upside of about 27% in the new year.
Analysts love this small-cap’s base of assets and its ability to punch well above its weight in generating free cash flow (FCF) – the cash remaining after a company has paid its expenses, interest on debt, taxes and long-term investments to grow its business.
“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,” writes Stifel analyst Michael Scialla (Buy).
The analyst also praises PDC Energy’s commitment to returning cash to shareholders. In December, the company announced a $50 million special dividend.
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4. Karuna TherapeuticsGetty Images
Market value: $3.9 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.38 (Strong Buy) Karuna Therapeutics (KRTX, $132.22) is a clinical-stage biopharmaceutical firm focusing on treatments for schizophrenia, psychosis and dementia. Although analysts are bullish on its prospects, be forewarned that small-cap stocks in the biopharmaceutical industry are often speculative and risky.
The bull case on Karuna hinges in large part on the development of its KarXT therapy for schizophrenia, notes Stifel.
“If successful, we believe KarXT could generate more than $1 billion in U.S. schizophrenia sales,” writes analyst Paul Matteis (Buy). “Beyond schizophrenia psychosis, Karuna is also planning on developing KarXT in schizophrenia cognitive and negative symptoms, as well as in Alzheimer’s disease psychosis and pain.”
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.”
Be forewarned that there is a long way to go from new drug development to approval. That said, analysts really like Karuna’s chances. Of the 16 analysts covering KRTX tracked by S&P Global Market Intelligence, 10 rate it at Strong Buy and six call it a Buy. Their average price target of $173.85 gives shares implied upside of about 30% in 2022.
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3. Tenable HoldingsGetty Images
Market value: $5.4 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.38 (Strong Buy) The Street sees Tenable Holdings (TENB, $50.58) as an optimal way to play the ever-growing threat hackers present to corporations’ increasingly complex digital operations.
“Tenable is transforming how customers manage and measure cybersecurity risk by providing a unified view of the organization’s attack surface,” writes Needham analyst Mike Cikos (Buy). “Vulnerabilities extend beyond the typical corporate network’s servers and infrastructure to assets such as cloud infrastructure, containers, Internet of Things (IoT) devices and Operational Technology (OT) like Industrial Control Systems.”
That sort of holistic approach to cybersecurity not only allows managers to make better strategic decisions, the analyst adds, but it also helps security teams prevent and address threats.
And given Tenable’s leadership position in the fast-growing vulnerability management market, analysts are all in.
“Tenable is our Top Pick for 2022,” Cikos says. “The company anticipates a 20%-plus compound annual revenue growth rate through 2025.”
Relatedly, the Street expects the company to generate average annual earnings per share (EPS) growth of 20% over the next three to five years.
Most of the pros covering Tenable have it among their top small-cap stocks to buy in 2022. Of the 16 analysts covering TENB, 10 rate it at Strong Buy and six say Buy, per S&P Global Market Intelligence. Their average target price of $66.33 gives shares implied upside of about 31% in the next 12 months or so.
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2. ArvinasGetty Images
Market value: $4.2 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.25 (Strong Buy) Loads of pharma and biotech stocks saw their share prices jump last year because of their work developing vaccines and treatments for COVID-19. But that doesn’t mean efforts have stopped on thousands of drugs being developed to treat everything else.
One such company that continues to chug along is Arvinas (ARVN, $78.91). This clinical-stage biopharmaceutical company creates therapies for the treatment of certain cancers.
Wedbush analyst Robert Driscoll rates shares at Outperform, applauding the company’s development of a class of targeted therapeutics called PROTACs, which are designed to degrade disease-causing proteins.
“We believe shares are undervalued given multiple additional data readouts ahead, as well as a broadening clinical pipeline,” Driscoll writes.
Over at Stifel, analyst Bradley Canino initiated coverage of ARVN at Buy in September, praising the firm’s leading edge technology.
“ARVN is a pioneer targeted protein degrader (TPD) company that we view as most properly deploying this emerging biological tool to first solve clear unmet needs in markets large enough to financially support future development of riskier, traditionally ‘undruggable’ targets,” Canino writes.
Of the 16 analysts covering ARVN, 12 call it a Strong Buy and four say Buy. Their average target price of $129.53 gives shares implied upside of more than 60% in 2022.
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1. Rocket PharmaceuticalsGetty Images
Market value: $1.5 billionDividend yield: N/AAnalysts’ consensus recommendation: 1.17 (Strong Buy) Rocket Pharmaceuticals (RCKT, $22.83) is another small biotech with promising drugs under development, and it currently tops the list of Wall Street’s favorite small-cap stocks to buy for 2022.
Indeed, with a consensus recommendation score of 1.17, RCKT is a high-conviction Strong Buy. As with all such stocks in its sector, caution is warranted. Names like RCKT tend to be a bit speculative, after all.
Regardless, analysts are plenty bullish on the name, which focuses on developing gene therapies for rare and devastating pediatric diseases.
“With five ongoing Phase I/II clinical trials consisting of both in-vivo and ex-vivo gene therapy platforms targeting multiple rare diseases, we believe Rocket is taking a sound strategic approach, while continuing in the right direction to successfully tackle its ambitious goals for a relatively young company,” writes William Blair analyst Raju Prasad (Outperform). Further continuation in this strategic direction could unlock significant value creation for the company.”
Of the 12 analysts covering RCKT tracked by S&P Global Market Intelligence, 10 rate it at Strong Buy and two call it a Buy. Meanwhile, their average price target of $68.80 implies Rocket’s share price will quadruple in 2022.
Be forewarned, however, that the Street doesn’t expect the biotech to be profitable on an operating basis until fiscal 2024.