Over the long term, small-cap stocks, which traditionally have market capitalizations smaller than $2 billion, have tended to provide higher returns than large caps because they tend to be less efficient and riskier than large companies. Unfortunately, small caps have underperformed in recent years, with large caps outperforming by significant margins.
However, 2025 could be the year small-cap stocks break out, given the shifting dynamics in the market.
Why small caps could stand to outperform in 2025
There are some good reasons to expect small-cap stocks to outperform in 2025. For example, falling interest rates tend to be good for small caps. Since 1957, small caps have outperformed large caps in the first three, six and 12 months after the Federal Reserve's first interest rate cut, according to Francis Gannon of small-cap specialist Royce Investment Partners.
Morningstar also noted that strategists remain optimistic that some of the recent momentum in small caps could last in the medium term. Additionally, small-cap multiples look fairly low relative to their larger counterparts, and the earnings of smaller companies are expected to recover, which should boost valuations unless inflation remains too much of a concern.
Further, BNP Paribas (OTC:BNPQY) sees the potential for industrial production to shift back to the U.S. in the coming years after years of companies focusing on outsourcing production to lower-cost nations.
Amid all these reasons to monitor small-cap stocks this year, some small caps look more attractive than others currently. For example, certain sectors may stand to outperform more than others.
“Small cap health-care stocks may be a particularly good place to look for value,” said Michael Fontaine, managing partner of Brookline Capital Markets. “The sector has underperformed recently, but we usually see renewed interest from investors around the J.P. Morgan Healthcare Conference, which takes place in January.”
Without further ado, here are some of the best small-cap stocks to watch in 2025.
Auna
Focusing on Spanish-speaking Latin America, Auna SAA ADR (NYSE:AUNA) is a health-care provider in Peru and Colombia that aims to significantly improve and integrate the region's health-care system. The company operates a network of hospitals and clinics and offers health plans. Auna also incentivizes prevention while concentrating on the most complex diseases in an end-to-end health-care ecosystem.
Its share-price decline notwithstanding, what makes Auna a small-cap stock to watch for 2025 is the growing number of up-and-coming companies in Latin America right now. Names like e-commerce giant MercadoLibre (NASDAQ:MELI) (MELI) and online travel agency operator Despegar (NYSE:DESP) (DESP), both based in Argentina, demonstrate the tremendous growth evident across Latin America, an extremely underpenetrated region of the world in most sectors, including health care.
Context Therapeutics
Biopharmaceutical company Context Therapeutics Inc (NASDAQ:CNTX) is developing the next generation of T-cell-engaging bispecific antibodies targeting solid tumors. The company currently has three drug candidates in its pipeline, including CTIM 76, which is in Phase 1 clinical trials. Context expects to dose its first patient with CT-95 in the first quarter, and it's looking to mid-2026 for the IND filing for CT-202.
Context Therapeutics caught my eye for its science and technology. T-cell-engaging bispecific antibodies bind to antigens located on tumor cells and CD3 subunits on T cells simultaneously, enabling them the recruit T cells to target the tumor. Much research into what T cells can do to treat cancer is currently underway, making Context Therapeutics a small cap to watch for 2025.
Additionally, the company's stock has soared 30%+ year to date and 70%+ over the past year, so investors are clearly interested and already watching these shares.
EVgo
Evgo Inc (NASDAQ:EVGO) is my electric vehicle pick, given that the best EV makers have all grown well beyond small-cap status. The company is building a network of charging stations across the U.S., and as the number of EVs on the market grows, we can expect EVgo's (NASDAQ:EVGO) revenues to grow as well. EVgo and General Motors (NYSE:GM) (GM) recently surpassed 2,000 public fast-charging stalls through their continuing metro-area charging collaboration — a partnership that makes EVgo look quite attractive.
What makes EVgo a small-cap stock to watch in 2025 is the tremendous growth that's on tap. Analysts are forecasting revenue of $361.2 million for next year, which would be a 50% year-over-year increase. If they end up being correct, EVgo shares could soar throughout the year. In the third quarter, the company posted record revenue of $67.5 million, a 92% year-over-year increase, so there is precedent for such tremendous revenue growth.
In 2024, shares of EVgo skyrocketed 70%+, and they've more than doubled over the last 12 months.
Flushing Financial
With a market cap of $498.5 million, Flushing Financial Corporation (NASDAQ:FFIC) is the holding company for Flushing Bank, which has branches in NYC's Queens, Brooklyn, Manhattan and Long Island.
Flushing Financial will be a stock to watch in 2025 because it was one of a fairly small number of publicly traded regional banks to come through the regional banking crisis in 2023 relatively unscathed. For one thing, the bank didn't experience a run on deposits like many others did in early 2023.
In fact, average total deposits actually rose 6.2% year over year and 2% quarter over quarter in the first quarter of 2023. In Q2 2023, average total deposits increased 7.1% year over year and 1.3% quarter over quarter.
Meanwhile, Flushing Financial trades at a price-to-book-value ratio of only 0.75x. While many regional bank stocks have skyrocketed this year amid their recoveries, Flushing Financial has gotten somewhat left behind, rising just 9% year to date. As a result, the stock could be worth a look for those bullish on the regional banking sector.
Freightos
Freightos Ltd (NASDAQ:CRGO) operates a digital freight booking platform, addressing a $1.6 trillion industry that transports almost everything we eat, wear and use around the globe. Freights touts its platform as making international shipping faster, more cost effective and more reliable.
What makes Freightos interesting is its rapid growth and the recent addition of Qantas Freight to its air cargo booking platform. In the third quarter, the company posted a 21% increase in revenue with a 65% IFRS gross margin, up from 54.9% a year ago. IFRS operating losses shrank from $9.3 million a year ago to $4.9 million in the latest quarter. Freightos has $41.3 million in cash and equivalents and short-term bank deposits, so it's got stability for the near terms as it grows.
The addition of Qantas to the company's platform to search, compare and book capacity for all Qantas and Jetstar services between the U.S., Australia and New Zealand across its WebCargo and 7LFreight by WebCargo platforms. This is certainly a big win that makes Freightos a stock to watch in 2025.
Inhibikase Therapeutics
Inhibikase Therapeutics Inc (NASDAQ:IKT) targets neurodegenerative and other diseases caused by dysfunction in the protein kinase family known as Abelson tyrosine kinases. The company specifically aims for the point at which degeneration is initiated inside the affected neurons.
Inhibikase hase one small-molecule treatment in Phase 3 trials for stable-phase chronic myeloid leukemia and second small-molecule treatment in Phase 2 trials for Parkinson's disease, neurogenic constipation and dysphagia. The same treatment is reaching the end of Phase 1/1b trials for multiple system atrophy.
Inhibikase Therapeutics will be worth watching in 2025 because its stock has more than doubled this year so far after surging in early October. The company announced the pricing of a $110 million private placement to advance its candidate IkT-001Pro into a late-stage trial in pulmonary arterial hypertension, a total addressable market expected to be worth $11.6 billion by 2032.
Oklo Inc.
The largest company on this list by market cap, Oklo Inc (NYSE:OKLO) is a somewhat undiscovered energy stock. We've seen plenty of coverage for big nuclear names like NuScale Power (SMR) and Constellation Energy (NASDAQ:CEG) (CEG).
However, we're just starting to see early signs of coverage for the much-smaller Oklo, which designs and deploys advanced fission power plants for clean, affordable and reliable energy. The company states that it uses the same fission reaction that energizes nuclear power plants, but in a new way that also uses nuclear waste as fuel.
While many nuclear-related stocks have exploded this year, with some putting up astonishing gains, Oklo has roughly doubled in price. I would expect coverage of this stock to pick up dramatically in the coming year as more investors discover this interesting nuclear startup.
Opus Genetics
Opus Genetics Inc (NASDAQ:IRD) is working on first-in-class gene therapies for retinal conditions. Ocuphire Pharma recently acquired Opus Genetics, retaining the Opus name. The merger enabled the combined company to work on gene therapies for inherited retinal diseases.
Opus is largely targeting orphan conditions like Leber congenital amaurosis 5 (LCA5), bestrophin-1-related inherited retinal diseases or bestrophinopathies, and autosomal dominant retinitis pigmentosa caused by RHO mutations.
The combination of Ocuphire and Opus Genetics makes this company interesting because it transformed it into a gene-therapy biotech firm. It will take some time to see results, but the pipeline is interesting.
Penguin Solutions
Unsung semiconductor company Penguin Solutions Inc (NASDAQ:PENG) largest division is Advanced Computing, which involves building integrated computing platforms. However, the company's artificial intelligence solutions also fall under this umbrella. Penguin recently struck a deal with Dell (NYSE:DELL) to include its OriginAI architecture in some of Dell's AI-optimized servers, which could mean significant growth in 2025 if customers opt to include the company's technology in the servers they order.
Penguin Solutions is a small-cap stock to watch for 2025 because of its valuation. Trading at a price-to-sales (P/S) ratio of 0.9x, the company looks like a steal compared to the broader semiconductor industry's current average P/S of 12.3x.
Penguin Solutions is calling for a 15% year-over-year growth rate in sales for fiscal 2025. That would be a significant improvement from the decline in net sales in fiscal 2024, which fell from $1.4 billion in 2023 to $1.2 billion in 2024. Importantly, Penguin discontinued its Brazil operations, which contributed to its recent revenue declines.
The company has also displayed solid growth in its non-GAAP gross margin, which rose 20 basis points year over year to 31.9% for fiscal 2024. Of course, Penguin Solutions will have to show some progress toward a growth recovery in 2025, but this stock is worth watching because the company looks promising.
Wolfspeed
Also a smaller semiconductor company, Wolfspeed Inc (NYSE:WOLF) is another up-and-comer that stands on the brink of potential improvement going forward. The company grew its automotive business by 2.5 times year over year in the latest quarter. For all of 2024, the number of car models using Wolfpeed's silicon carbide power train rose four times, and the company expects it to grow another 75% year over year.
At a P/S of 1.5x, Wolfspeed also looks like a bargain compared to the broader semiconductor industry, even after the more-than 10% increase early on Dec. 9. The rally came after the release of a Form 424B5 with the Securities and Exchange Commission that revealed an equity distribution agreement with J. P. Morgan Securities and Wells Fargo (NYSE:WFC) Securities providing for the offer and sale of up to $200 million worth of shares from time to time through or directly to the firms.
Like Penguin Solutions, Wolfspeed is a stock to watch for 2025 to see if the suggested growth comes to pass.
Investing in small-cap stocks
Of course, many investors look to small-cap stocks for their long-term outperformance, but investing in smaller companies can sometimes be somewhat risky. On the other hand, with higher risk comes the potential for higher returns, even sometimes in the near-to-medium term with the right stock picks.
Nonetheless, investors are always advised to do their own due diligence before investing in any stock, idea or theme. This post does not represent investment advice.