Four 'top-notch' funds, eight 'under-the-radar' stocks for small-cap investors

The S&P SmallCap 600 index has risen 1.5% year to date, while the broader-market S&P 500 has fallen more than 3.0%. On the one hand, investors are seeking more attractive alternatives to tech stocks and diversifying their portfolios, Barron's writes in a feature. On the other, earnings among small-cap companies are recovering after nearly three years of decline. That “represents a meaningful shift” for smaller companies, T. Rowe Price notes. Trailing 12-month earnings for the S&P SmallCap 600 have increased nearly 30% since last October, following almost three years of contraction.

Stock gains are also being supported by expectations of further interest-rate cuts by the Fed – a favorable backdrop for smaller companies given their higher financing costs. Many small caps are domestically focused, as well. However, this could prove to be a double-edged sword if the economy weakens amid rising energy prices amid the conflict in the Middle East, Barron’s notes.

Barron’s, with the help of consulting firms Envestnet and Mercer, selected four investment funds whose performance has typically outpaced benchmark indexes. It also spoke with their managers to identify the most attractive small-cap opportunities. Based on this, Barron’s compiled a list of funds and stocks investors may want to consider.

The fund manages $150 million in assets. Its average annual return over the past 10 years has been 11.8%, compared with 11.0% for the Russell 2500 Value index. Comanager Mimi Morris highlighted the following stocks.

BankUnited

BankUnited is one of the largest banks in South Florida. Its outlook is tied to declining short-term interest rates, which are boosting its net interest margin. At the same time, the bank is expanding its loan portfolio, while moving off mortgages issued at ultralow rates in the early 2020s.

South Florida is one of the fastest-growing regions in the U.S., which could make BankUnited an attractive acquisition target for larger players, Morris said. The stock has five “buy” ratings from Wall Street analysts, five “hold” ratings, and one “sell.” The average target price of $54 per share implies 26.8% upside versus the close on Tuesday.

Champion Homes

Champion Homes, which sells manufactured and modular homes, is poised to benefit as buyers seek more affordable housing amid elevated home prices and relatively high mortgage rates. The average home price in the U.S. exceeds $400,000, while a typical Champion home costs about four times less, Barron’s notes. Easing regulatory requirements for manufactured housing in Washington should also support the company, as previous rules increased construction costs. Morris also points to the company’s premium product lineup, which could help expand margins.

Five Wall Street analysts rate the stock “buy,” while two recommend “hold.” The average target price is $98.60 per share, implying upside of more than 31%.

Royce Premier fund focuses on small-cap companies with strong financial positions, avoiding heavily regulated industries and businesses with high leverage. Over the past 10 years, the fund has delivered annual returns of 12.3%, compared with 10.5% for the Russell 2000 index. Comanager Steven McBoyle told Barron’s investors should consider the following stocks.

ESAB

ESAB Corporation, a welding-equipment manufacturer, has only two major global competitors – Lincoln Electric Holdings and Illinois Tool Works, providing it with pricing power, Barron’s writes. It also notes that the U.S. manufacturing sector began recovering in January and February after 10 months of contraction. This, according to analysts at JPMorgan cited by Barron’s, should support companies in cyclical industries, including ESAB. In addition, the company recently announced a $1.5 billion acquisition of Eddyfi Technologies, which supplies equipment for the aerospace, defense, and nuclear sectors. The deal is expected to support growth and improve profitability.

Nine Wall Street analysts rate ESAB shares “buy,” one rates them “hold,” and one “sell.” The average target price of $151.88 per share implies upside of more than 56%.

FirstService

Canada-based FirstService Corporation, whose shares also trade on the Nasdaq, is one of the largest property management companies in North America. Its services also include light repair and roofing. In a highly fragmented industry, it is one of the few players with a national network, giving it an advantage over hundreds of smaller operators, McBoyle noted. “They often get the first call from insurance carriers after a large storm,” he said.

The stock has nine “buy” ratings from Wall Street analysts and one “hold.” The average target price of $204.70 per share implies nearly 45% upside.

Since its inception in April 2022, the Kennedy Capital Small Cap Value fund has delivered an average annual return of 11.7%, compared with 9.4% for the Russell 2000 Value index over the same period. For its portfolio, the fund looks for companies that convert invested capital into stable cash flows, often through reinvestment in their business or via acquisitions, Kennedy Capital Management chief investment officer Frank Latuda told Barron's. 

AZZ

AZZ Inc. treats steel and aluminum to protect against corrosion. Its services are already in steady demand among industrial companies, while growth prospects are tied to the boom in data-center demand and the reshoring of manufacturing in the U.S., Barron’s writes. Among the company’s advantages is the proximity of its facilities to major construction sites – something competitors cannot easily replicate, Latuda noted. He also highlighted expected margin expansion, partly driven by the opening of a new facility in Washington.

Six Wall Street analysts rate AZZ shares “buy,” while five recommend “hold.” The average target price of $141.11 per share implies 15.6% upside.

Patrick Industries

Patrick Industries sells, among other things, fixtures, sidewalls, and windshields for RVs and boats, as well as building materials. The company has grown rapidly through acquisitions of smaller manufacturers, including RV panel maker Elkhart Composites and Medallion Instrumentation Systems, which produces digital controls and lighting for boats, Barron’s writes.

It notes that a recovery in the RV market is expected to be a key growth driver for the company – dealer inventory data suggest the market has bottomed. Seven Wall Street analysts rate Patrick Industries shares “buy,” one rates them “hold,” and one “sell.” The average target price of $141.44 per share implies nearly 25.6% upside.

FullerThaler Behavioral Small-Cap Equity relies on behavioral economics research by Nobel laureates Richard Thaler and Daniel Kahneman to identify undervalued stocks. In practice, this often means focusing on companies where investors have overreacted to news or overlooked signals such as insider buying, Barron’s writes. Over the past 10 years, the fund has delivered average annual returns of 14.9%, compared with 10.4% for the Russell 2000 index.

Allison Transmission Holdings

Allison Transmission Holdings is the world’s largest manufacturer of automatic transmissions for commercial trucks and other heavy-duty equipment – from school buses to tanks. The company dominates the market, holding more than 50% share in certain niches, FullerThaler portfolio manager Raymond Lin told Barron’s. He links the company’s prospects to its defense segment. Lin also expects earnings growth driven by the recent acquisition of the Off-Highway Drive & Motion Systems business, which produces components for vehicles used in construction and mining industries.

Currently, seven Wall Street analysts rate the stock “hold,” three “buys,” and two “sells.” The average target price of $130.11 per share implies nearly 15.3% upside.

Primoris Services

Primoris Services Corporation builds and maintains energy infrastructure – power plants, solar facilities, and transmission lines. These are in high demand amid rising electricity consumption from data centers, Barron’s writes. So far, this segment accounts for only about 10% of the company’s revenue (which totaled $7.6 billion in 2025), and FullerThaler views it as a significant growth opportunity.

In addition, the company has beaten quarterly forecasts 12 consecutive times, FullerThaler research director Raife Giovinazzo was quoted as saying in Barron’s. “This is a company that continues to surprise – and we think people continue to underreact,” he said.

Most Wall Street analysts share FullerThaler’s optimism: nine rate the stock “buy,” four “hold,” and one “sell.” The average target price of $169.47 per share implies nearly 22.6% upside.