Why Our Small-Cap Stock Portfolio Has Been Crushing The S&P This Year

Recently, small-cap stocks have begun to outshine the broader market indices, marking a notable shift in investor sentiment. Through the first half of this year, large-cap stocks, and particular four stocks in particular (NVDA 📈, MSFT 📈, GOOG 📈 and AMZN 📈), had driven market gains. A few months ago, however, the tables turned. 

The shift can be observed particularly well in our small-cap stock portfolio. Though it’s been beating the S&P since the start of the year, its outperformance took off during the month of July.

The driving forces behind the rally in small-cap stocks

The resurgence in small-cap stocks is driven by several factors.

Growing confidence in economic growth

Investors are increasingly confident that the US economy remains on sound footing with economic growth regaining steam. Smaller companies tend to have more exposure and a higher degree of agility to benefit from a pick up in domestic growth.

Fear of inflation is waning

As inflationary pressures ease and interest rates stabilize, the cost of capital becomes less burdensome for small businesses, enabling them to capitalize on growth opportunities more effectively. Economists have started to describe the economic context as a Goldilocks economy.

Institutional money rotation

Following the rally in large-cap stocks, investors are increasingly seeking value in the relatively underappreciated small-cap segment, leading to a rotation of capital that has sparked this recent outperformance. This rotation is particularly powerful when considering the fact that hedge funds headed into the month of July with a near-record short position in small caps.

Our three top performing small-cap stocks

While our small-cap stock portfolio is up by as much as 37.6% through the end of August, some stocks have been doing particularly well.

Piper Sandler (PIPR) 📈

YTD performance: +56%

Ziggma Score: 96

2024 Price/Earnings: 12.4x

2024 Revenue Growth: 14%

Piper Sandler Companies is an investment bank and institutional securities firm that serves a wide range of clients, including corporations, private equity groups, and public entities both in the U.S. and internationally. The company provides investment banking, sales, trading, and research services for equity and fixed income products, along with advisory services for mergers, acquisitions, and restructuring.

What’s been driving PIPR’s share price

PIPR’s 56% year-to-date gain can be pinned one the following factors.

Consistent earnings beat

The company has exceeded earnings expectations repeatedly, including significant beats in multiple quarters. For example, in Q2 2024, Piper Sandler posted earnings per share (EPS) of $2.52, surpassing analyst predictions by $0.26.

Revenue growth

In addition, Piper Sandler has delivered strong revenue growth, with a notable 23.7% year-over-year increase in Q2 2024. This growth is attributable to the firm’s robust performance across its various financial services, including investment banking and institutional securities.

Optimistic Market Outlook

Investors are optimistic about Piper Sandler’s future growth prospects, with earnings expected to grow significantly over the next year. The company’s ability to navigate market challenges and capitalize on opportunities in the financial services sector has contributed to its strong stock performance.

2. CSW Industrials (CSWI) 📈

YTD performance: +63%

Ziggma Score: 96

2025 Price/Earnings: 41x

2025 Revenue Growth: 7%

CSW Industrials is a diversified industrial company that operates through two main segments: Industrial Products and Specialty Chemicals. The Industrial Products segment provides specialty mechanical items, building products, and equipment for various industrial applications, while the Specialty Chemicals segment offers a range of products, including lubricants, sealants, and adhesives. These products cater to general industrial needs, focusing on protection, maintenance, and application in various industries both in the U.S. and internationally.

What’s been driving CSWI’s share price

CSWI’s outperformance within the strong small-cap stocks segment can explained by these factors.

Earnings growth

The company reported record financial results, including significant increases in earnings per share, driven by effective pricing strategies, cost management, and strategic acquisitions like Cover Guard and Falcon. Next year’s earnings growth is projected at 27%.

Margin expansion

Additionally, CSWI has shown a an impressive ability to enhance operating margins through reduced freight costs and operational efficiencies across its various segments, particularly in Contractor Solutions, further bolstering investor confidence.

3. Enova International (ENVA) 📈

YTD performance: +55%

Ziggma Score: 93

2024 Price/Earnings: 9.9x

2024 Revenue Growth: 36%

Enova International, Inc. is a technology-driven company offering online financial services across the U.S., Brazil, Australia, and Canada. It provides various financial products, including installment loans, lines of credit, and loan-related services, partnering with third-party lenders and banks to offer near-prime unsecured consumer loans.

What’s been driving ENVA’s share price

The following factors have been powering this top-performing small-cap stock this year.

Revenue growth

ENVA has been experiencing significant growth in revenue. In Q2 2024, ENVA reported a 26% increase in revenue compared to the previous year, along with a substantial rise in adjusted EBITDA, as demand for the company’s services has been strong.

Cost management

Enova has demonstrated solid operational efficiency, which has manifested in successive profitability gains.

Successful business execution

Analysts have also highlighted the company’s strategic focus on shorter-duration loans, thereby lowering credit risk.

Where will small-cap stocks go from there?

We believe outperformance in small-cap stocks can continue, as the drivers behind the recent rally play out. Stock investors can employ the Ziggma Stock Score in their stock research in order to build a shortlist of the small-cap stocks with the greatest appreciation potential. There are always quality companies in the space, producing cash flows that trade at a discount. 

Important Notice

This article is not investment advice. We cannot predict whether these stocks will go up or down.

We believe the information contained in this text to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice. Please consider your full financial situation prior to making an investment decision.