Five Italian small caps poised for outperformance into year-end 2025

Italian small caps often get overlooked, yet many offer meaningful growth exposure in niches with global demand, from energy and industrial equipment to aerospace technologies. Some companies benefit from large government investment programs, while others are accelerating expansion through active M&A.

Below, Francesco Bergamini, head of Freedom24’s Italy office, highlights five small caps he views as the most compelling and discusses their key drivers. In his assessment, green energy, defense, telecommunications, and industrial technologies stand out among sectors, offering a mix of steady income and long-term growth.

Italy’s economy is expected to grow about 1.1% in 2025 – modest, but still a rebound after years of stagnation. Despite inflation and strains in global supply chains, the industrial base has held up. Against this backdrop, small caps look well positioned given their exposure to fast-growing segments tied to the energy transition, aerospace, and smart industrial machinery.

Rising national investment in green energy, along with the continued strength of aerospace leaders such as Leonardo, supports a more constructive long-term outlook.

Government programs, including the National Recovery and Resilience Plan (PNRR), are also lifting spending on infrastructure and innovation. Combined with an active M&A market, these initiatives signal improving momentum across key sectors and a stronger competitive footing for Italy within the euro zone.

Bergamini pointed to three themes that, in his view, will shape the performance of Italian small caps through year-end. This is where outperformance should occur.

Carel manufactures electronic controllers and control systems for HVAC (Heating, Ventilation and Air Conditioning), commercial refrigeration and data center cooling systems. The company focuses on energy efficiency and digitalization and is becoming the "new standard" supplier for food retail, HoReCa, and refrigeration infrastructure.

Carel has a strong research base, continues to refresh its product lineup, and is expanding internationally. Its partnerships with Italian food producers and its role in national green energy initiatives strengthen its strategic outlook.

Investment case: Carel offers exposure to the shift toward energy efficiency and decarbonization across the real economy. Rising demand for smart solutions and a growing share of higher-margin services support potential EBITDA growth.

The stock is up 27% year to date. Investors should monitor margin performance and the company’s ability to maintain pricing power amid volatility in component costs.

Avio is a core player in Europe’s space industry and the manufacturer of Vega rockets. The company also participates in defense programs and is increasing its presence in commercial launches.

Italy’s role in the European Space Agency and the Arianespace launch services consortium has strengthened the country’s position in Europe’s space sector. Government partnerships offer Avio an advantage as defense and technology spending rises.

Investment case: Avio is a bet on the next growth cycle for Europe’s aerospace sector after a multiyear pause. Modernization programs within the Italian armed forces, including defense-oriented space technologies, are adding demand. The restart of private launches, growing defense orders, and engine demand underpin potential margin expansion.

The shares have surged nearly 190% year to date. The consensus rating is “overweight.” The company’s growth potential is structural and long-term, though risks include technological setbacks, reliance on government orders, and long capex cycles.

Interpump is the world leader in the high-pressure industrial pumps segment and one of the largest players in the hydraulics and industrial components market. It benefits from Italy's focus on renewable energy development. The company operates in a wide range of sectors, from power generation to industrial cleaning, and has a strong export base.

Investment case: Interpump is a classic "industrial champion." Its combination of services and stable cash flows offers margin protection even during cyclical downturns.

The shares have been broadly flat year to date, but the consensus rating is “buy,” according to MarketWatch data. The shift toward smart technologies strengthens Interpump’s competitive position both in traditional and in emerging industrial applications.

ERG is one of Europe’s largest independent renewable energy operators. The company has fully exited hydrocarbons, shifting to solar, storage, and onshore wind, which now make up most of its installed capacity.

Italy has accelerated investment in renewable infrastructure in recent months. The government is expanding incentives for wind and solar, with a focus on grid connections and energy storage.

Investment case: ERG fits ESG criteria and has a long project pipeline. The company continues to invest in renewable capacity and generates steady income from long-term contracts. Short-term results depend on weather and spot electricity prices, but the underlying trend is supportive.

ERG shares are up 9% year to date, and the consensus rating is “overweight.” The portfolio includes both operational assets and new projects, and long-term power purchase agreements provide cash flow visibility.

Millicom (symbol: TIGO) operates mobile, cable, and digital services in Latin America and Africa. The company reported strong operating growth in 2025, paid an interim dividend, and increased its focus on free cash flow generation.

Investment case: Millicom is a play on structural growth in emerging regions and monetization of digital services. The company is positioned to benefit from accelerating digital adoption in Italy and abroad.

The shares, listed on the Nasdaq, have about doubled year to date. The consensus rating is “overweight.” The stock suits portfolios seeking growth with a dividend component. Key risks include currency volatility and political uncertainty in emerging markets.

This material does not constitute investment advice.

The AI translation of this story was reviewed by a human editor.