Barron’s: Eight small caps promising big returns

Analysts interviewed by Barron’s have spotlighted eight small caps with strong long-term return potential — three in the housing sector, another three in defense, and two in cybersecurity.

Peter Roy, a portfolio manager at Argent Capital, believes investors looking to profit from a small-cap rebound should look at the housing market. “There is a chronic undersupply of homes,” he argues.

He highlighted three holdings from his portfolio:

— Green Brick Partners, a land developer building new homes in suburban areas;

— Champion Homes, a manufactured-home builder;

— UFP Industries, a supplier of wood and composite decking.

Randy Gwirtzman, a portfolio manager at Baron Capital, meanwhile, fingered small-cap defense and cybersecurity stocks, citing plans for increased military spending in the U.S.

He recommended five of his holdings:

— Mercury Systems, a missile defense company specializing in software;

— Karman Holdings, which designs and develops missile systems;

— Kratos Defense & Security Solutions, an unmanned drone manufacturer;

— CyberArk, a cybersecurity company;

— SentinelOne, another cybersecurity company.

According to Barron’s, easing from the Fed, which the market expects later this year, could give small caps a boost. The Fed made three rate cuts in 2024 but took a pause earlier this year, wary of mounting inflation. Since smaller companies often rely on floating-rate loans to fund their operations, lower rates would ease their debt burdens.

Additionally, expectations for increased M&A activity in the small-cap space could also provide support, notes Tim Skiendzielewski, a portfolio manager at Rockefeller Asset Management. Investors had been anticipating a wave of M&A deals since Trump’s return to the White House, but trade wars thwarted the high hopes, Barron’s writes. Activity picked back up after the most damaging of the Trump tariffs were temporarily suspended. As reported by Barron’s, three deals were announced in just one week: The cable company Charter Communications unveiled plans to acquire peer Cox Communications; sporting goods retailer Dick’s Sporting Goods announced its intention to buy footwear seller Foot Locker; and the brokerage Robinhood disclosed an agreement to purchase Canadian digital asset company WonderFi.