In this article, we will be taking a look at the 12 Cheap Small-Cap Stocks to Invest In Before the Next Breakout. 

As January 2026 progresses, the U.S. stock market is seeing a notable shift, with large-cap dominance, led by the “Magnificent Seven,” showing signs of fatigue. On December 17, Lale Akoner, Global Market Analyst at eToro, told CNBC that investors are rotating from mega-cap tech into small caps, cyclicals, and financials.

Regarding market rotation, she anticipates the trend will persist for some time, with capital shifting from high-multiple mega-cap winners to small caps, cyclicals, and foreign markets. She claims that this tendency will continue since the Fed’s monetary policy will remain lax due to “the end of the quantitative tightening” and rate reductions. Additionally, she said that in the upcoming quarters, the fiscal policy will have a greater impact on the US economy.

Akoner added that she prefers downcap stocks since they are still cheap, particularly in light of the impending Fed rate reduction. Generally speaking, small caps fare better later in the rate-cutting cycle. The fiscal policies and the new tax plan, which benefit R&D-intensive small caps in particular and allow them to increase their R&D expenditures, are additional factors that support this stance. According to her, both of these elements work quite well with little caps.

Our Methodology 

For our methodology, we began by filtering stocks based on market cap between $300 million and $2 billion, a forward PE ratio of at least 20, and positive analyst sentiments. From the filtered list, we selected the top 12 stocks and ranked them in ascending order based on their total number of hedge fund holders as of Q3 2025, as tracked by Insider Monkey database. In cases where stocks had the same number of HF holdings, we used their market cap to tiebreak between them.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 427.7% since May 2014, beating its benchmark by 264 percentage points (see more details here).

Here is our list of the 12 cheap small-cap stocks to invest in before the next breakout.

12. Sigma Lithium Corporation (NASDAQ:SGML)

Number of Hedge Fund Holders: 15 

Market Capitalization: $1.37 billion 

Forward PE Ratio: 34.97

Sigma Lithium Corporation (NASDAQ:SGML) is one of the best small-cap stocks on our list.

TheFly reported on January 16 that Canaccord downgraded SGML from Buy to Hold and the price target to C$20.50 from C$14 as part of its Q4 preview for the Canadian critical minerals group. Although the firm increased its longer-term price assumptions for 2026 and 2027, it adopted a more cautious stance as it awaits the resumption of mining operations and greater clarity on the company’s ability to use its waste piles.

Separately, a day earlier, on January 15, Bank of America raised its price target on Sigma Lithium Corporation (NASDAQ:SGML) to $14 from $13 and maintained an Underperform rating. The firm described the company’s recent operational update as non-consequential and non-incremental to its existing thesis, and added that a potential equity raise remains possible, even if it proves dilutive.

Sigma Lithium Corporation (NASDAQ:SGML) is a leading global lithium producer focused on supplying carbon-neutral, socially and environmentally sustainable lithium concentrate for electric vehicle batteries.

11. Similarweb Ltd. (NYSE:SMWB)

Number of Hedge Fund Holders: 17 

Market Capitalization: $529.77 million 

Forward PE Ratio: 49.02

Similarweb Ltd. (NYSE:SMWB) is one of the twelve best small-cap stocks on our list.

TheFly reported on January 13 that Goldman Sachs downgraded SMWB from Buy to Neutral and lowered its price target to $7.50 from $10. The analyst cited challenges for the company in boosting growth to levels that would drive share outperformance. Despite increased sales and marketing spending in early 2025, Similarweb Ltd. (NYSE:SMWB)’s core growth metrics remain flat or declining, which raises concerns for 2026 projections.

Separately, on the same day, SWMB and Manus announced a partnership to integrate SWMB’s data into the Manus AI agent platform. This collaboration allows Manus customers to leverage AI agents for data-driven digital marketing, including creating marketing plans and analyzing competitive positions, using real web traffic and engagement metrics.

Similarweb Ltd. (NYSE:SMWB) is a global digital intelligence company that provides web and mobile analytics, traffic data, and market insights to help businesses benchmark performance, analyze trends, and optimize digital strategies. Its platform powers competitive research, customer acquisition, and decision‑making for enterprises worldwide.

10. Guardian Pharmacy Services, Inc. (NYSE:GRDN)

Number of Hedge Fund Holders: 18 

Market Capitalization: $1.71 billion 

Forward PE Ratio: 27.47

Guardian Pharmacy Services, Inc. (NYSE:GRDN) is one of the best small-cap stocks to invest in.

TheFly reported on January 14 that Stephens analyst Raj Kumar maintained an Overweight rating on GRDN and raised the price target to $36 from $35. The update came after Guardian completed the acquisition of one long-term care pharmacy in Montana, released its 2026 forecast, and reaffirmed its 2025 revenue and adjusted EBITDA guidance.

Separately, a preliminary forecast for the fiscal year 2026 was also released on January 13 by Guardian Pharmacy Services, Inc. (NYSE:GRDN), which estimated revenue between $1.40 billion and $1.42 billion after accounting for recent reductions in wholesale acquisition costs (WAC) and adjustments to drug prices under the Inflation Reduction Act. The business anticipates strong single-digit revenue growth, excluding these effects. A year-over-year rise of roughly 11% and an improvement in the adjusted EBITDA margin of over 8% are reflected in the predicted adjusted EBITDA of $115 million to $118 million.

Guardian Pharmacy Services, Inc. (NYSE:GRDN) is a U.S. long‑term care (LTC) pharmacy services company that provides technology‑enabled medication management and pharmacy support to residents of assisted living, behavioral health, and skilled nursing facilities.

9. Werner Enterprises, Inc. (NASDAQ:WERN)

Number of Hedge Fund Holders: 18 

Market Capitalization: $1.98 billion 

Forward PE Ratio: 42.92

Werner Enterprises, Inc. (NASDAQ:WERN) is one of the best small-cap stocks to invest in.

TheFly reported on January 15 that Barclays raised its price target on WERN to $33 from $28, maintaining an Equal-Weight rating on the stock. The update came as part of a Q4 transportation sector preview. While truckload rates showed improvement, Barclays noted that the broader recovery in freight volumes remains uncertain.

Similarly, on January 14, Stifel also raised the price target for Werner Enterprises, Inc. (NASDAQ:WERN) to $29 from $26 and maintained a Hold rating as part of the firm’s Q4 truckload shippers preview. The firm also highlighted that supply conditions have improved significantly since COVID, with spot rates climbing over 25% from October to year-end, which makes the strongest fourth-quarter growth in a decade.

Werner Enterprises, Inc. (NASDAQ:WERN) is a leading U.S. transportation and logistics company providing truckload, dedicated, expedited, intermodal, freight brokerage, and final‑mile services across the United States, Mexico, and Canada.

8. Ichor Holdings, Ltd. (NASDAQ:ICHR)

Number of Hedge Fund Holdings: 21 

Market Capitalization: $1.02 billion 

Forward PE Ratio: 45.66

Ichor Holdings, Ltd. (NASDAQ:ICHR) is one of the best small-cap stocks to invest in.

TheFly reported on January 20 that Needham upgraded ICHR from Hold to Buy with a $36 price target. The firm stated that while execution under new leadership still needs to be demonstrated, the company is expected to gain from improved conditions in the semiconductor equipment industry. Strong demand over the last ninety days, according to commentary from the Needham Growth Conference, supports an industry view that is generally favorable.

Similarly, earlier this month, on January 14, Craig-Hallum raised its price target on Ichor Holdings, Ltd. (NASDAQ:ICHR) to $36 from $26 and gave it a Buy rating. The upgrade followed strong preliminary Q4 2025 results and guidance, with Q1 2026 revenue expected above Street estimates and sequential gross margin improvement. Craig-Hallum noted that ICHR is well-positioned to benefit from an improved semiconductor capital spending cycle in the coming years.

Ichor Holdings, Ltd. (NASDAQ:ICHR) is a U.S. technology company that designs, engineers, and manufactures critical fluid delivery subsystems and components, especially gas and chemical delivery systems, used in semiconductor capital equipment.

7. Gold Royalty Corp. (NYSE:GROY)

Number of Hedge Fund Holders: 23 

Market Capitalization: $1.21 billion

Forward PE Ratio: 86.96

Gold Royalty Corp. (NYSE:GROY) is among the best small-cap stocks.

TheFly reported on January 15 that H.C. Wainwright raised the price target for GROY from $6.25 to $7 and maintained a Buy rating. The update came after the company acquired an additional net smelter return royalty on the Borborema mine, which contributed to the revised target.

Just a day earlier, on January 14, Gold Royalty Corp. (NYSE:GROY) reported that it had reached a deal with Dundee Corporation to purchase a net smelter royalty on the Borborema gold mine in Brazil for a total of $45 million. The consideration includes $30 million in cash and approximately 3.57 million newly issued common shares, based on a 20-day volume-weighted average price of $4.20.

Gold Royalty Corp. (NYSE:GROY) is a precious metals royalty and streaming company that provides creative financing to the mining industry. It acquires royalties and streams on gold and other assets across the Americas, building a diversified portfolio that offers investors exposure to long‑term production and exploration upside.

6. Fastly, Inc. (NASDAQ:FSLY)

Number of Hedge Fund Holders: 24 

Market Capitalization: $1.35 billion 

Forward PE Ratio: 60.61

The sixth stock on our list of best small-cap stocks is Fastly, Inc. (NASDAQ:FSLY).

TheFly reported on January 16 that Citi analyst Fatima Boolani lowered the price target on FSLY to $10 from $12 and maintained a Neutral rating. The adjustment was made as part of Citi’s 2026 outlook for the infrastructure software group, with the firm expecting the sector’s momentum from 2025 to carry into the new year.

Separately, on January 5, RBC Capital raised its price target on Fastly, Inc. (NASDAQ:FSLY) to $10 from $9 and maintained a Sector Perform rating. According to the firm, companies that are positioned to promote enterprise AI adoption may see additional AI-related tailwinds in 2026. Despite cautious early-2026 forecasts from management teams, RBC stated that enterprise investment appeared to be stabilizing in several sectors, with generative AI driving innovation.

Fastly, Inc. (NASDAQ:FSLY) is a U.S. cloud computing and edge-infrastructure company that provides high-performance content delivery network (CDN), edge computing, security, and web-performance services.

5. Sunstone Hotel Investors, Inc. (NYSE:SHO)

Number of Hedge Fund Holders: 24 

Market Capitalization: $1.74 billion 

Forward PE Ratio: 175.44

The next stock on our list of best small-cap stocks is Sunstone Hotel Investors, Inc. (NYSE:SHO).

TheFly reported on January 12 that Baird analyst Michael Bellisario downgraded SHO from Outperform to Neutral, keeping the price target at $10. The downgrade reflects SHO’s “show me” status, as several of its assets and markets are still recovering. Additionally, the firm noted that SHO’s portfolio has less favorable exposure to FIFA World Cup markets, and a near-term acquisition is considered unlikely.

Separately, a week earlier, on January 5, Wells Fargo upgraded Sunstone Hotel Investors, Inc. (NYSE:SHO) to Overweight and raised the price target to $11 from $10. The firm expects SHO to lead lodging REITs in 2026 RevPAR growth, which is supported by a strong event calendar, softer comparisons, and an improving transaction market.

Sunstone Hotel Investors, Inc. (NYSE:SHO) is a U.S. lodging real estate investment trust (REIT) that acquires, owns, and actively manages upper‑upscale and luxury hotels in key urban and resort markets.

4. Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY)

Number of Hedge Fund Holders: 26

Market Capitalization: $716.15 million

Forward PE Ratio: 41.04

Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) stands fourth on our list of best small-cap stocks.

TheFly reported on January 16 that Benchmark upgraded PLAY from Hold to Buy with a $30 price target. The firm cited a “credible setup” for positive same-store sales in Q1, which would mark the first such inflection in roughly 13 quarters. Benchmark’s conviction is supported by improving food and beverage execution and incremental traffic from the expanded Half Price Games promotion launched on January 4.

Separately, earlier this month, on January 5, Truist Securities analyst Jake Bartlett lowered the price target on Dave & Buster’s (NASDAQ:PLAY) to $18 from $23 and gave it a Hold rating. Bartlett noted that after a challenging year for restaurants, the outlook for 2026 is mixed, with temporary tailwinds from tax refunds and favorable weather offset by ongoing headwinds from slowing job growth, declining consumer confidence, and commodity inflation.

Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) is a U.S. restaurant and entertainment company combining full‑service dining, bars, arcade games, and live sports viewing in “Eat Drink Play Watch” venues.

3. Amplitude, Inc. (NASDAQ:AMPL)

Number of Hedge Fund Holders: 27 

Market Capitalization: $1.33 billion 

Forward PE Ratio: 59.52

The third stock on our list of best small-cap stocks is Amplitude, Inc. (NASDAQ:AMPL)

TheFly reported on January 15 that Morgan Stanley upgraded AMPL from Equal Weight to Overweight and raised its price target to $16 from $14. The firm expects AMPL to benefit from increased volumes of digital product user behavior data as generative AI accelerates the development of mobile and web applications. Additionally, Morgan Stanley pointed out that there is no seat-based pricing overhang and the shares are trading at a fair price, which supports additional potential.

Additionally, Amplitude, Inc. (NASDAQ:AMPL) reported on January 14 that it acquired InfiniGrow, which is an AI-powered marketing analytics company. The acquisition enhances AMPL’s platform by enabling marketers to better measure, forecast, and optimize the revenue impact of marketing through AI-driven insights and scenario modeling.

Amplitude, Inc. (NASDAQ:AMPL) is a U.S. tech company providing a digital analytics platform that helps businesses understand customer behavior, optimize product experiences, and drive growth. Its subscription‑based software delivers insights, experimentation, and AI‑enabled tools for product, data, and marketing teams worldwide.

2. DiamondRock Hospitality Company (NASDAQ:DRH)

Number of Hedge Fund Holders: 32 

Market Capitalization: $1.91 billion 

Forward PE Ratio: 22.95

DiamondRock Hospitality Company (NASDAQ:DRH) is placed second on our list of best small-cap stocks.

TheFly reported on January 16 that Morgan Stanley analyst Stephen Grambling raised the price target on DRH to $9.00 from $8.50 and maintained an Equal Weight rating. The firm noted that gaming, lodging, and leisure fundamentals were “muted” in 2025, with growth concentrated in areas serving older, wealthier consumers. For 2026, Morgan Stanley expects similar trends, with the additional impact of rates boosting goods relative to services.

In contrast, earlier on January 13, Deutsche Bank upgraded DHR from Hold to Buy and raised the price target to $12 from $10. The firm cited the stock’s relative valuation and company-specific catalysts and noted that DRH’s market exposure and “operator acumen” should support solid RevPAR and EBITDA growth in 2026 and 2027. Deutsche Bank also expects the company’s markets to outperform.

DiamondRock Hospitality Company (NASDAQ:DRH) is a U.S. self‑advised real estate investment trust (REIT) that owns and manages a diversified portfolio of premium hotels and resorts in major gateway cities and leisure destinations.

1. STAAR Surgical Company (NASDAQ:STAA)

Number of Hedge Fund Holders: 34 

Market Capitalization: $1.04 billion 

Forward PE Ratio: 55.25

STAAR Surgical Company (NASDAQ:STAA) tops our list for being one of the best small-cap stocks on our list.

TheFly reported on January 16 that Morgan Stanley resumed coverage of STAA with an Underweight rating and a $13 price target following the termination of its merger agreement with Alcon (ALC). The firm described STAAR’s EVO ICL technology as “impressive” but noted it remains a niche product with a limited addressable patient pool. Morgan Stanley added that expansion in the U.S. and other Western markets will likely be challenging, even as the company executes effectively, and highlighted that it is “a bit surprising” the shares are trading above pre-merger levels.

Concurrently, on the same day, Canaccord Genuity lowered its price target on the stock to $22 from $30.75 and maintained a Hold rating. The adjustment follows the company’s cooperation agreement with its largest shareholder, Broadwood Partners, and the rejection of the Alcon merger by shareholders. Canaccord shifted its valuation framework back to STAAR’s standalone fundamentals rather than the proposed Alcon deal price.

STAAR Surgical Company (NASDAQ:STAA) is a U.S. ophthalmic medical device firm that designs, develops, manufactures, and markets implantable lenses, especially the EVO family of Implantable Collamer Lenses (ICLs), for vision correction to reduce reliance on glasses or contact lenses.

While we acknowledge the potential of STAA to grow, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and have limited downside risk. If you are looking for an AI stock that is more promising than STAA and that has 100x upside potential, check out our report about this cheapest AI stock.

READ NEXT: 12 Best Multibagger Stocks to Buy Heading into 2026 and 7 Best Rising Tech Stocks to Buy Now.

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