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.
Stocks
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.
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