10 Small Cap Stocks with Wide Moats

In this article, we will be taking a look at the 10 small cap stocks with wide moats.

The beginning of 2022 saw big losses for small-cap stocks, but this soon began to change, as seen by the performance of such stocks as of this July. These stocks have historically been attractive to investors looking to invest early in companies that have a chance of rapidly growing since their market capitalizations are contained within the figures of $300 million to $2 billion. With market caps, this low, small-cap stocks are typically considered to be attractive options for those looking to find a diamond in the rough. Small-cap stocks outperforming the market in July also helped increase the popularity of these stocks among investors. According to a Wall Street Journal article published this July, the Russell 2000 Index of small-cap companies rose by 3.6% that month, while the S&P 500 fell behind with its 3% increase.

Larger companies with more recognizable names, like Apple Inc. (NASDAQ:AAPL), Visa Inc. (NYSE:V), and Mastercard Incorporated (NYSE:MA) have always been investor favorites. However, the performance of small-cap stocks observed above has made these companies also gain in popularity again this year. Investors are now beginning to focus more on small companies with a niche business model that offers them a huge competitive advantage, thus promising long-term growth. Such companies are said to have a wide economic moat.

What are wide moat stocks?

Companies with attractive pricing and a sustainable competitive advantage are called wide moat companies. A company’s moat is rapidly becoming one of the leading metrics in investment strategies to pick those stocks that offer prospective growth because of their command over a particular sector. One index that provides exposures to such companies is the Morningstar Wide Moat Focus Index, comprising companies with Morningstar Economic Moat Ratings of Wide that are trading at the lowest current market price with fair value ratios.

According to a Morningstar Equity Research report, as of 2020, the Wide Moat Focus Index generated an average annual outperformance of 363 basis points versus its benchmark since its 2007 inception date. The Index’s annual total return for 2020 stood at 10.71%, compared to an annual total return of 6.91% for the Morningstar US Market Index, which is its benchmark. This shows the capability of wide moat stocks to outperform the general market, leading to their increased popularity among investors today.

Source: pexels

Let’s now take a look at the 10 small cap stocks with wide moats.

Our Methodology

For our list below, we have selected stocks with market capitalizations between $400 million and $2 billion dollars. According to financial journalists from Morningstar and ETFs tracking wide moat stocks, these are some of the most competitive stocks in the market because of their wide economic moats. We have also considered other fundamentals, such as each company’s EPS and revenue growth, and profit margins among more, while selecting them for our list.

Small Cap Stocks With Wide Moats

10. Whitestone REIT (NYSE:WSR)

Number of Hedge Fund Holders: 9

Market Capitalization as of December 27: $473.1 million

Whitestone REIT (NYSE:WSR) is a real estate investment trust that acquires, owns, manages, develops, and redevelops high-quality open-air neighborhood centers. The company primarily conducts its business operations in the largest, fastest-growing, and most affluent markets in the Sunbelt. It is based in Houston, Texas.

A Hold rating was reiterated on Whitestone REIT (NYSE:WSR) shares on December 5.

Whitestone REIT (NYSE:WSR) is a real estate company that has managed to give itself a competitive edge in the Sunbelt by acquiring 60 retail properties with a focus on favorable demographics and economics. It’s also smart with its business, as it targets triple-net leases with annual rent bumps and a share of the tenant’s sales, using this strategy to protect itself from inflation while boosting its revenues. As of this November, Whitestone REIT (NYSE:WSR) has seen a 9.1% improvement in its funds from operations per share year-over-year.

Nine hedge funds were long Whitestone REIT (NYSE:WSR) in the third quarter, with a total stake value of $30.3 million. Of these funds, Highland Capital Management was the largest stakeholder in the company, holding 1.6 million shares worth $13.6 million.

Whitestone REIT (NYSE:WSR), like Apple Inc. (NASDAQ:AAPL), Visa Inc. (NYSE:V), and Mastercard Incorporated (NYSE:MA), is wide moat stock with a competitive advantage in the market.

9. Proto Labs, Inc. (NYSE:PRLB)

Number of Hedge Fund Holders: 17

Market Capitalization as of December 27: $661.1 million

Proto Labs, Inc. (NYSE:PRLB) is an e-commerce-driven digital manufacturer of custom prototypes and on-demand production parts. The company operates worldwide and is based in Maple Plain, Minnesota. It offers injection molding, computer numerical control machining, three-dimensional printing, and more.

On November 29, Troy Jensen at Lake Street initiated coverage of Proto Labs, Inc. (NYSE:PRLB) shares with a Buy rating.

There are not many companies in the market for digitally manufactured customized prototypes, making Proto Labs, Inc. (NYSE:PRLB) well-positioned to capitalize on an evergrowing market. According to analysts at Bersit Research, the market for such prototypes is expected to grow at a compound annual growth rate of over 17%. Proto Labs, Inc. (NYSE:PRLB) reported that its international revenue accounted for about 21%, 20%, and 22% of the company’s total revenue in 2021, 2020, and 2019, respectively. This shows how the company is also making headway outside the US and making a global name for itself to increase its profitability.

There were 17 hedge funds long Proto Labs, Inc. (NYSE:PRLB) in the third quarter. Their total stake value was $68.4 million.

Harding Loevner, an investment management firm, mentioned Proto Labs, Inc. (NYSE:PRLB) in its fourth-quarter 2021 investor letter. Here’s what the firm said:

“For the year, the portfolio’s US stocks failed to keep up with the robust returns of the region in the face of a pronounced style headwind, as US small cap growth stocks trailed their value peers by over 1,400 basis points. Disappointing business results from several US companies also worked against us. Earnings at Protolabs, a rapid prototyping and manufacturing company, fell on a margin decline caused by ongoing investments in IT infrastructure and rising material and wage inflation.”

8. W&T Offshore, Inc. (NYSE:WTI)

Number of Hedge Fund Holders: 21

Market Capitalization as of December 27: $825.3 million

W&T Offshore, Inc. (NYSE:WTI) is an energy company based in Houston, Texas. The company is an independent oil and natural gas producer engaged in the acquisition, exploration, and development of oil and natural gas properties in the Gulf of Mexico. It sells crude oil, natural gas liquids, and natural gas.

Stifel’s Derrick Whitfield resumed coverage of W&T Offshore, Inc. (NYSE:WTI) shares with a Buy rating on October 25.

W&T Offshore, Inc. (NYSE:WTI) is a competitive stock in the energy sector because, unlike other companies, it has a hedging department. This allows the stock to stay on top of markets and maintain its profitability. In the third quarter, W&T Offshore, Inc. (NYSE:WTI) reported an adjusted EBITDA of $113.9 million and an adjusted net income of $48.7 million. Compared to its competitors, the company also reported a total revenue increase of 98.95% year-on-year.

D E Shaw was the largest stakeholder in W&T Offshore, Inc. (NYSE:WTI) in the third quarter, holding 2.3 million shares worth $13.5 million. In total, 21 hedge funds were long the stock, with a total stake value of $56.7 million.

7. Healthcare Services Group, Inc. (NASDAQ:HCSG)

Number of Hedge Fund Holders: 19

Market Capitalization as of December 27: $899.8 million

Healthcare Services Group, Inc. (NASDAQ:HCSG) is a diversified support services company based in Bensalem, Pennsylvania. The company provides management, administrative, and operating services to the housekeeping, laundry, linen, facility maintenance, and dietary service departments of nursing homes, retirement complexes, rehabilitation centers, and hospitals. It operates through its Housekeeping and Dietary segments.

Benchmark analyst Bill Sutherland upgraded Healthcare Services Group, Inc. (NASDAQ:HCSG) shares from Hold to Buy on October 20.

With its focus on the senior housing and care industry, Healthcare Services Group, Inc. (NASDAQ:HCSG) is among the few companies commanding a large part of the market in this sector. The company is one of the largest third-party providers of services like housekeeping and dining, and manages almost all of these services at over 3,000 healthcare facilities across the US. As of this February, Healthcare Services Group, Inc. (NASDAQ:HCSG) reported a client retention rate of over 90%. In 2021, the company’s net income stood at $45.86 million.

Healthcare Services Group, Inc. (NASDAQ:HCSG) was found among the 13F holdings of 19 hedge funds in the third quarter, with a total stake value of $77.7 million.

Harding Loevner, an investment management firm, mentioned Healthcare Services Group, Inc. (NASDAQ:HCSG) in its fourth-quarter 2021 investor letter. Here’s what the firm said:

“For the year, the portfolio’s US stocks failed to keep up with the robust returns of the region in the face of a pronounced style headwind, as US small cap growth stocks trailed their value peers by over 1,400 basis points. Disappointing business results from several US companies also worked against us. Healthcare Services, a provider of outsourced housekeeping and dietary services for post-acute-care and long-term assisted living facilities, saw its rising labor and food costs weigh on both revenues and profits as some of its customers balked at higher fees.”

6. Core Laboratories N.V. (NYSE:CLB)

Number of Hedge Fund Holders: 10

Market Capitalization as of December 27: $903.3 million

Core Laboratories N.V. (NYSE:CLB) is an energy company providing reservoir description and production enhancement services and products to the oil and gas industry. The company operates in the US, Canada, and internationally. It is based in Amstelveen, Netherlands.

Luke Lemoine at Piper Sandler assumed coverage of Core Laboratories N.V. (NYSE:CLB) shares with a Neutral rating on October 7.

The reservoir description business is one that not many companies have waded into just yet, making Core Laboratories N.V. (NYSE:CLB) well-positioned to command a larger percentage of the market there. The company’s experience in the US shale, compared to newer competitors, gives it a competitive edge. In the second quarter, Core Laboratories N.V. (NYSE:CLB) saw its revenue grow by 5% quarter-over-quarter to $120.9 million. Its EBITDA stood at $17.1 million, or $64 million on an annualized basis.

There were 10 hedge funds long Core Laboratories N.V. (NYSE:CLB) in the third quarter, of which Ariel Investments was the largest stakeholder holding 9.8 million shares worth $131.6 million. The total stake value in the company was $141.7 million.

Alger Capital, an investment management company, mentioned Core Laboratories N.V. (NYSE:CLB) in its third-quarter 2022 investor letter. Here’s what the firm said:

“Core Laboratories N.V. (NYSE:CLB) is a unique oil services company that provides reservoir description and production enhancement services and products to the oil and gas industry. These services and products enable Core Laboratories’ clients to improve performance and increase resource recovery from producing fields. Shares underperformed during the quarter even though the company’s production enhancement segment-with its outsized exposure to domestic activity-reported strong results. However, the reservoir description segment-which is more reliant upon international activity (both onshore and offshore)-has recovered more slowly. The company’s global rig count, which has historically been a leading indicator of future reservoir description activity, has improved recently, giving us confidence in the business’s longer-term fundamentals.”

Core Laboratories N.V. (NYSE:CLB), like Apple Inc. (NASDAQ:AAPL), Visa Inc. (NYSE:V), and Mastercard Incorporated (NYSE:MA), is a highly competitive stock in the market, and many hedge funds are piling into it today.

5. Upstart Holdings, Inc. (NASDAQ:UPST)

Number of Hedge Fund Holders: 20

Market Capitalization as of December 27: $1.02 billion

Upstart Holdings, Inc. (NASDAQ:UPST) is a consumer finance company based in San Mateo, California. The company operates a cloud-based artificial intelligence lending platform in the US.

A Hold rating was reiterated on Upstart Holdings, Inc. (NASDAQ:UPST) shares on November 9 by analyst John Hecht at Jefferies.

Upstart Holdings, Inc. (NASDAQ:UPST) is a company in the finance sector with a strong moat since it offers an alternative for people looking to access credit. The company is different from others in the finance sector since it offers personal loans to consumers with no or limited credit history, opening up a largely ignored market for it to profit from. The company guided for revenues of $800 million by the end of 2022. Marco Atzeni at Investing Milestone expects Upstart Holdings, Inc. (NASDAQ:UPST) to see revenue growth of 25% from 2024 to 2027.

There were 20 hedge funds long Upstart Holdings, Inc. (NASDAQ:UPST) in the third quarter, with a total stake value of $81.4 million.

Vulcan Value Partners, an investment management firm, mentioned Upstart Holdings, Inc. (NASDAQ:UPST) in its second-quarter 2022 investor letter. Here’s what the firm said:

“Upstart Holdings Inc. was a material detractor for the quarter. It was a mistake, and we sold our position. Upstart is an artificial intelligence (AI) and cloud-based lending platform. The company uses AI models that are designed to underwrite superior loans with lower interest rates, lower default rates, higher approval rates, and increased underwriting automation. When we purchased Upstart, we believed the company had an excellent product and the addressable market was large.

Upstart’s results during 2021 were impressive. In the first quarter of 2022, the company reported solid results but lowered guidance and, more importantly, used its balance sheet to warehouse loans temporarily. The company’s decision to use its balance sheet to finance its growth surprised us and other market participants, and its stock price decreased dramatically. While we admire the management team, we are less confident in the company’s long-term prospects.

It will be more difficult than we anticipated for Upstart to extend its competitive advantages with smaller banks into adjacent markets such as auto loans and mortgages. As a result, our value for Upstart is unstable and the company no longer qualifies for investment. We are following our discipline and reallocating capital into companies with more stable values.”

4. Medifast, Inc. (NYSE:MED)

Number of Hedge Fund Holders: 18

Market Capitalization as of December 27: $1.28 billion

Medifast, Inc. (NYSE:MED) is a consumer staples company based in Baltimore, Maryland. It manufactures and distributes weight loss and weight management products.

Linda Weiser at DA Davidson holds a Neutral rating on Medifast, Inc. (NYSE:MED) shares as of November 4.

Medifast, Inc. (NYSE:MED) uses a unique angle to get a competitive edge in the weight management sector. The company has a “buddy system” model of weight loss management, offering its services through designated coaches who develop personal connections with its clients. Between 2017 and 2022, the company has seen massive revenue growth from $300 million in 2017 to the $1.59 billion figure in 2022.

Medifast, Inc. (NYSE:MED) was found among the 13F holdings of 18 hedge funds in the third quarter. Their total stake value was $120 million.

Miller Howard Investments, an investment management firm, mentioned Medifast, Inc. (NYSE:MED) in its third-quarter 2021 investor letter. Here’s what the firm said:

“AFTER A METEORIC RISE OVER THE PAST YEAR, small-cap stocks reversed course with the Russell 2000 Index down -4.4% for the quarter. Much of the downdraft was focused on stocks that had done well in the pandemic environment but lost favor with investors who see a recovery on the horizon. Our largest detractors have all benefitted from pandemic-driven demand. Medifast (MED), a provider of weight loss programs and our second biggest detractor, traded off this quarter over worries that their success has been bolstered by people working from home.”

3. Stem Inc. (NYSE:STEM)

Number of Hedge Fund Holders: 27

Market Capitalization as of December 27: $1.37 billion

Stem Inc. (NYSE:STEM) is an electrical components and equipment company based in San Francisco, California. It operates as a digitally connected and intelligent energy storage network provider in the US and internationally.

UBS analyst Jon Windham initiated coverage of Stem Inc. (NYSE:STEM) shares on October 25 with a Buy rating.

In the electric storage industry, Stem Inc. (NYSE:STEM) is a company with a strong strategy to continue winning market share and assert its dominance. The company invested over $8 million in software development in the first half of 2022, allowing it to continue being a leader in the electric storage technology area. This December, Stem Inc. (NYSE:STEM) confirmed its 2025 financial targets, including a gross margin of 25% to 30% and an adjusted EBITDA margin between 15% and 20%.

Our hedge fund data shows 27 funds long Stem Inc. (NYSE:STEM) in the third quarter, with a total stake value of $199 million.

2. XPEL Inc. (NASDAQ:XPEL)

Number of Hedge Fund Holders: 13

Market Capitalization as of December 27: $1.62 billion

XPEL Inc. (NASDAQ:XPEL) is an auto parts and equipment company based in San Antonio, Texas. It manufactures and distributes after-market automotive products.

The company is leading the market with its well-built brand, ensuring that it cannot be replicated. XPEL Inc. (NASDAQ:XPEL) commands a large total addressable market in North America because of the sheer number of automobiles in the area. Jay Capital expects XPEL Inc. (NASDAQ:XPEL) to see revenue growth between the company’s 2022 guidance of 25% to 28% by the end of this year.

In total, 13 hedge funds were long XPEL Inc. (NASDAQ:XPEL) in the third quarter. Their total stake value was $123 million.

Wasatch Global Investors, an asset management company, mentioned XPEL Inc. (NASDAQ:XPEL) in its third-quarter 2022 investor letter. Here’s what the firm said:

“XPEL, Inc. (NASDAQ:XPEL) also contributed. The company manufactures and distributes automotive paint and surface-protection films, window films, and ceramic coatings. XPEL benefits as buyers of luxury vehicles adopt products previously sold primarily to automotive enthusiasts. The stock had been down in the first half of 2022 as investors wrestled with concerns over supply-chain pressures and difficulties facing consumers. However, we continued to have confidence in XPEL’s management team and business model. We thought the company would withstand temporary challenges and was still on track to produce the growth we had expected over the long term. During the third quarter, we were gratified as the stock rebounded based on strong earnings that defied the negative trend for many consumer-oriented businesses.”

1. Compass Minerals International, Inc. (NYSE:CMP)

Number of Hedge Fund Holders: 20

Market Capitalization as of December 27: $1.71 billion

Compass Minerals International, Inc. (NYSE:CMP) is a diversified metals and mining company. It produces and sells essential minerals in the US, Canada, the UK, and internationally.

Within the mining segment, Compass Minerals International, Inc. (NYSE:CMP) focuses on a niche area: salt and plant nutrition. This means the company has identified a specialized area within the mining segment where it has been able to become a lead player. In the third quarter, the company’s salt segment included a 10% increase in its total revenues, with EBITDA margins at 20% to 28%.

Compass Minerals International, Inc. (NYSE:CMP) had 20 hedge funds long its stock in the third quarter. Their total stake value was $139 million.

Investment management company Cove Street Capital mentioned Compass Minerals International, Inc. (NYSE:CMP) in its third-quarter 2022 investor letter. Here’s what the firm said:

“Our largest contributor in the quarter was Compass Minerals International, Inc. (NYSE:CMP) which continues to be either our best or worst performer any numbers of quarters in a row, for reasons that have little to do with long-term value drivers. The key variable here is the successful repricing on annual municipal contracts for road de-icing salt, the results of which will show up in the first half of 2023 snow season. That movement accounts for most of our now $65-ish value on the dilution from the sale of 17% of company shares to a Koch energy unit, which is funding and assisting in the development of the company’s Lithium asset on the Great Salt Lake. Having done an immense amount of work in the space, we have concluded that Compass’s asset is the “tallest height-challenged North America Lithium project,” albeit that bar is very low. Again, we also own the potential of something positive happening here, given the incredibly large gap between “we want electric cars” and “where the heck are we going to get the Lithium for the batteries. That’s particularly the case if China and South American supply proves a challenge in cost and availability.”

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Disclosure: None. 10 Small Cap Stocks With Wide Moats is originally published on Insider Monkey.