Looking for small cap stocks to buy and hold for the coming year and beyond? Quite a few small caps are already surging while showing promise and sustainability. But it’s important not to throw darts at a wall and pick a lottery ticket. To capitalize on the strength and upside of small caps today, it’s important to narrow the field.

The best way to add a new gem to your portfolio is to diversify. Where are you lacking exposure? If you have a portfolio full of financials and healthcare stocks, you might consider adding a small cap utility or something from the industrials sector. While it might feel like deviating from the norm, diversification is a good hedge. It’s an even better hedge when you consider the volatility of small caps.

Here’s a look at some small cap rising stars from the major sectors of the stock market. Consider delving into these buy-and-hold candidates if you’re intent on adding a small cap or two to your portfolio.

Investors looking for small cap stocks to buy and hold

Energy and Utility Small Cap Stocks to Buy and Hold

  • Crescent Point Energy Corp. (NYSE: CPG) is an oil and gas company with a history of growth. In just 20 years, it’s become Canada’s 12th-largest oil and gas producer. The reason it’s on the rise: new leadership, which replaces long-tenured leaders previously chastised for mismanagement.
  • NorthWestern Corp. (Nasdaq: NWE) serves South Dakota, Nebraska and Wyoming as a utility provider. A stable track record makes this company appealing, and the current EBITDA (earnings before interest, taxes, depreciation and amortization) margin makes it an enticing buy. Diversification into other business lines remains a possibility.
  • Precision Drilling Corporation (NYSE: PDS) is the largest drilling contractor in Canada. While the company’s outlook at the moment isn’t great, it’s going through a restructuring that could leave it lean and ready to grow in the near future. If the company can overcome its current financial woes, it’s poised to grow.

Materials and Industrials

  • Construction Partners (Nasdaq: ROAD) is well-positioned to capitalize on an infrastructure reinvestment plan from the Biden administration. That, and the addition of assets and contracts in 2020, has put the company on a strong path to success in 2021 and beyond.
  • II-VI (Nasdaq: IIVI) could come out of the global semiconductor shortage swinging. This small cap domestic producer stands to benefit from supply chain diversification as companies continue to demand semiconductors. While slightly overvalued, it remains a long-term play.
  • U.S. Silica Holdings Inc. (NYSE: SLCA) has had a strong run up since the start of 2021, and many investors are looking closer at this mining company. With a tendency to underpromise and overdeliver, it’s posting consistent gains as it seeks to recapture the momentum of its 2017 heyday.

Healthcare

  • Community Health Systems Inc. (NYSE: CYH) is a Fortune 500 company that trades for less than $15 per share. This appealing investment prospect has a rocky history but a bright future in an industry that’s only growing larger. As it refocuses, there’s a strong runway for expansion.
  • Tactile Systems Technology Inc. (Nasdaq: TCMD) focuses on treating chronic conditions at home through advanced medical technologies. It stands to benefit from plenty of tailwinds, including an aging population and a demand for quality-of-life products, like the ones the company produces.
  • Xencor Inc. (Nasdaq: XNCR) develops cancer and autoimmune treatments using engineered monoclonal antibodies and cytokines. It has promising tech and great leadership that positions it for success in an industry just waiting to break out. It is a biotech that’s safer than many others out there.

Financials

  • BankUnited Inc. (NYSE: BKU) serves small- and middle-market businesses. It offers a full portfolio of commercial lending products, which are highly lucrative and in demand. It’s a regional play that could develop into a strong holding as it continues on an upward trend post-pandemic.
  • Banner Corp. (Nasdaq: BANR) is a Pacific Northwest bank that offers commercial real estate, construction, residential, agricultural and consumer loans. Extremely strong financials and a track record of good corporate governance make this a financial play for the long term.
  • Enova International (NYSE: ENVA) was part of the original online lending movement and has continued to diversify its capabilities, with exposure to Brazil. Its low price-to-earnings (P/E) ratio and recent uptick in income and profit have caught the eye of small cap investors looking for a bargain.

Consumer Discretionary

  • Citi Trends Inc. (Nasdaq: CTRN) sells discount clothing but is at the forefront of urban fashion trends. The company has done nothing but grow in 2021. Despite a high P/E ratio, it’s valued at less than $1 billion, with plenty of growth prospects as it continues to attract shoppers.
  • Nautilus Inc. (NYSE: NLS) has benefited from the boom of at-home fitness during the pandemic. While not a market leader, the company carved out a name in experiential fitness. It owns several strong brands. Its low P/E ratio and small cap status have investors excited about its long-term prospects.
  • Winmark Corp. (Nasdaq: WINA) capitalizes on the upcycling trend and demand for refurbished goods. The company recently announced a cash dividend as a marker of its success. Its strong history and solid balance sheet make it one of the safer small cap investments you’ll find.

Consumer Staples

  • Mohawk Group Holdings (Nasdaq: MWK) uses artificial intelligence and machine learning to introduce consumers to new brands. By connecting people to products based on search criteria, the company hopes to augment e-commerce in a way that drives major bumps in conversion. While still very small, there’s a bright future ahead for this company.
  • BJ’s Wholesale Club (NYSE: BJ) follows the Costco model, which has proven successful. While technically a midcap company, this rise happened recently – and the stock isn’t done moving. Experts see the company as undervalued, which makes it a great buy-and-hold candidate.
  • United Natural Foods Inc. (NYSE: UNFI) is a bulk-food distributor that’s tied in heavily to Amazon’s food ecosystem. As if this wasn’t enough reason to invest in the stock, the company also has great financials and fundamentals. It’s a strong buy-and-hold candidate as the future of home delivery intensifies.

Real Estate

  • Fathom Holdings (Nasdaq: FTHM) taps into the cloud and machine learning to provide smarter real estate brokerages services. The company has a great runway for growth and is inching toward profitability. Recent acquisitions could bring that goal into focus later in 2021. 
  • Innovative Industrial Properties (NYSE: IIPR) focuses on cannabis-related real estate, which ties it to one of the hottest segments of the market. As the United States inches toward deferral legalization, peripheral markets such as real estate will boom. This company could be among them.
  • QTS Realty Trust (NYSE: QTS) focuses on data centers, which makes it poised to capitalize as the need for data storage grows. The company has performed well since its inception but tends to fall under the radar of real estate investment trust investors due to its modest dividend.

Information Technology

  • Perficient (Nasdaq: PRFT) is a digital consulting firm serving enterprise customers. A good-looking balance sheet and strong client retention make the company a good long-term play. The only concern is its clear overvaluation: a P/E ratio of 63!
  • Sonos (Nasdaq: SONO) is a rare brand-name small cap that has a great track record of rewarding shareholders. Investors are keen on this stock long term because of its high-performance products and superior market penetration. Above anything else, it’s a stable investment.
  • Yext (NYSE: YEXT) produces a search engine designed to help brands optimize their on-site navigability. The company is a darling among small cap evangelists and poised for big growth in the coming year thanks to the return of service-based businesses post-pandemic.

Communications

  • Iridium Communications (Nasdaq: IRDM) leverages a network of satellites to form a global communication mesh. As talk about satellite-powered telecommunications becomes increasingly prevalent, this company is already at the forefront of the industry. It’s the true definition of a buy-and-hold.
  • Nexstar Media Group Inc. (Nasdaq: NXST) has been on a tear since the beginning of 2021. Its strong balance sheet, low P/E ratio and dividend make it a great small cap investment. As it expands its influence in the Southwest, investors see opportunity to grow its market cap through acquisition and new contracts.
  • Telephone and Data Systems Inc. (NYSE: TDS) has a stock chart like a roller coaster. That said, investors have high hopes for the stock in 2021. Demand for digital voice and data products has never been higher, and the company’s balance sheet is trending up. A solid dividend is the icing on this buy-and-hold cake.

Diversify for Growth

Diversification is good for your portfolio. Adding a stock from a sector you’re light in or have very little exposure to brings balance to your investments. Especially if you’re adding an up-and-coming small cap stock, this diversification is a great hedge against instability. And this is where Trade of the Day can help. Sign up for the Trade of the Day e-letter below for access to daily stock picks and trends.

As you think about small cap stocks to buy and hold, consider them from a sector standpoint. It becomes much easier to narrow down promising individual companies with regard to sector-specific performance.

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