In this piece, we will take a look at the Top Investors’ Stock Portfolio: 10 Small-Cap Stocks To Buy. If you want to skip our introduction to small-cap investing and the stock market then check out Top Investors’ Stock Portfolio: 5 Small-Cap Stocks To Buy.

Investing comes in all sizes and flavors and each of these is tailored to the market and economic environment. Certain stocks tend to avoid significant losses in troubling times while others provide strong growth when the economy is booming. Traditionally, the former category is often limited to large and mega cap stocks since their established business models, large cash reserves, and strong market presence provide stability even when the economy is stalling and consumer incomes do not allow for much spending.

The latter category is often preferred when the economy is recovering but is shunned if growth is slowing down. This is the small-cap stock category, and these firms typically have their market capitalization range between $250 million and $2 billion. Talking about small-cap companies that operate in America, these firms are typically insulated from global economic turmoil since their business models and operations are limited mostly to their home country. This also means that their performance, both financial and on the stock market, is also dependent on the strength of the U.S. economy.

Talking about small-cap stock performance, their shares are typically among the first to fall when investors believe that the economy might slow down. This is because small-cap stocks have smaller balance sheets which carry the risk of the business becoming a gone concern during a prolonged economic contraction in the worst case scenario, or a reduction in the operational scope through layoffs, facility shutdown, or both. Additionally, while small-cap stocks might be riskier than their large and mega cap counterparts due to these reasons, their lower share price also carry the potential for larger percentage returns. At the same time, the potential of fraud is also lower in small-cap companies, as while they might not be as big as their mega cap peers, the stocks are still shares of well established firms that are capable of generating strong cash flow.

So, it’s clear that small-cap stocks perform well in a robust economy or one that is recovering from a downturn instead of entering into one. The next step is to naturally look at the economy itself to determine where it’s heading. As opposed to the pre coronavirus era when things were relatively stable, the post COVID world has seen the public, Wall Street, and the government worry about the economy one way or the other. The virus was one of the worst periods for the American and global economy in history since stay at home orders shuttered down factories, hotels, and offices. This caused growth to drop and output to contract.

Since the coronavirus recession, the biggest worry for everyone has been inflation. While high prices offer a boon to businesses since they allow them to earn more revenue, they also lead to belt tightening as costs increase. At the same time, a responsible central bank has to act fast in the face of inflation or risk allowing it to become a permanent feature of the economy. Reducing inflation requires raising interest rates, a double edge sword that can cause further hardships to businesses and consumers.

On the interest rate front, recent economic data suggests that inflation will continue to be a tricky beast to contain. This is because October has once again provided a curve ball to the Fed and investors hoping with crossed fingers that interest rates drop soon. The first data set that is relevant here is the producer price index (PPI) for September which measures the price increases at the factory gate. It showed that PPI for final demand rose by 0.5%, higher than economist estimates of 0.3%. Core PPI, which removes food and energy from the mix, jumped by 2.8% annually as it dropped by 0.1% over the August figures. Investor reaction to these was muted, and for a brief moment, it appeared that most had determined that the higher prices were due to the pass through effect of high oil prices.

However, while the reaction was muted the first time around, the next data set added to the worries that not only might the Fed take longer to reduce interest rates but it might also raise them more later this year. This data set was the consumer price index (CPI) data, which is the inflation that everyone living in the United States is facing. According to the Labor Department, which releases the PPI and CPI data, the CPI rose by 3.7% annually and 0.4% monthly in September, which exceeded economist estimates that had pegged it to sit at 0.3% monthly and 3.6% annually. Additionally, core inflation stood at 0.3% monthly and only dropped on an annual basis to 4.1% from 4.3%. This led to the outcomes you’d most likely expect from high inflation data, as major stock market indexes dropped by 1% and bond yields once again started their march higher.

What the latest data means is the economy might not be slowing down after all, and amidst this backdrop, we decided to take a look at some top small-cap stocks. Out of these, the notable names are Chart Industries, Inc. (NYSE:GTLS), Chord Energy Corporation (NASDAQ:CHRD), and Super Micro Computer, Inc. (NASDAQ:SMCI).

Our Methodology

To compile our list of the top small-cap stocks, we first compiled the top 15 stocks in the iShares Core S&P Small-Cap ETF and the iShares Russell 2000 ETF – two of the biggest small-cap exchange traded funds. Then, the small-cap stocks were ranked by the number of hedge funds that had bought their shares during Q2 2023 courtesy of data from Insider Monkey’s database of 910 hedge funds. Out of these, the top ten small-cap stocks are listed below.

Top Investors’ Stock Portfolio: 10 Small-cap Stocks To Buy

10. Murphy Oil Corporation (NYSE:MUR)

Number of Hedge Fund Investors in Q2 2023: 29

Murphy Oil Corporation (NYSE:MUR) is an American oil producer headquartered in Houston, Texas. Despite a slowdown in the oil industry for most part of this year, the firm has beaten analyst EPS estimates for Q1 2023 and Q2 2023. Additionally, it also pays a 28 cent dividend for a 2.37% yield.

As of Q2 2023, 29 out of the 910 hedge funds part of Insider Monkey’s database had held a stake in Murphy Oil Corporation (NYSE:MUR). Out of these, the largest shareholder is Paul Marshall and Ian Wace’s Marshall Wace LLP since it owns 2.2 million shares that are worth $86.4 million.

Along with Chord Energy Corporation (NASDAQ:CHRD), Chart Industries, Inc. (NYSE:GTLS), and Super Micro Computer, Inc. (NASDAQ:SMCI), Murphy Oil Corporation (NYSE:MUR) is a top small-cap stock.

9. SM Energy Company (NYSE:SM)

Number of Hedge Fund Investors in Q2 2023: 30

SM Energy Company (NYSE:SM) is another American oil company with oil production operations in the Permian Basin and Western Texas. The company had some good news for investors in June when it announced that acquisitions and lower costs enabled a 2023 production growth of 1 million barrels of oil equivalent.

During this year’s second quarter, 30 out of the 910 hedge funds tracked by Insider Monkey were the firm’s shareholders. SM Energy Company (NYSE:SM)’s biggest investor among these is Israel Englander’s Millennium Management due to its $71.2 million stake.

8. ATI Inc. (NYSE:ATI)

Number of Hedge Fund Investors in Q2 2023: 30

ATI Inc. (NYSE:ATI) is a metalwork company that provides tungsten, titanium, and alloy based products for industrial use. Its shares are rated Strong Buy on average and analysts have penned in a $13 share price upside for the stock. The firm expanded its 3D manufacturing portfolio in September, as it announced plans to build a new facility in Florida as part of a contract with the U.S. Navy to provide it with components for nuclear propulsion.

As of June 2023, 30 out of the 910 hedge funds polled by Insider Monkey had held a stake in ATI Inc. (NYSE:ATI). D. E. Shaw’s D E Shaw is the largest stakeholder out of these since it owns $97.8 million worth of shares.

7. Axcelis Technologies, Inc. (NASDAQ:ACLS)

Number of Hedge Fund Investors in Q2 2023: 31

Axcelis Technologies, Inc. (NASDAQ:ACLS) is a backend American semiconductor company that provides equipment used to manufacture chips. Its stock has heavy ownership of institutional investors, which own more than 90% of its shares.

During 2023’s June quarter, 31 hedge funds among the 910 part of Insider Monkey’s research had bought the firm’s shares. Axcelis Technologies, Inc. (NASDAQ:ACLS)’s biggest hedge fund investor is Richard Driehaus’s Driehaus Capital since it owns 746,503 shares that are worth $136 million.

6. e.l.f. Beauty, Inc. (NYSE:ELF)

Number of Hedge Fund Investors in Q2 2023: 31

e.l.f. Beauty, Inc. (NYSE:ELF) is a beauty products company with a global presence and one that relies primarily on its website to generate sales. The firm was in the news in late September when it teamed up with actress Jennifer Coolidge to launch a new lip kit.

31 out of the 910 hedge funds part of Insider Monkey’s Q2 2023 database had held a stake in e.l.f. Beauty, Inc. (NYSE:ELF). Out of these, the company’s largest shareholder is Jim Simons’ Renaissance Technologies through a $220 million stake that comes via 1.9 million shares.

Chart Industries, Inc. (NYSE:GTLS), e.l.f. Beauty, Inc. (NYSE:ELF), Chord Energy Corporation (NASDAQ:CHRD), and Super Micro Computer, Inc. (NASDAQ:SMCI) are the top small-cap stocks for a top investor portfolio.

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Disclosure: None. Top Investors’ Stock Portfolio: 10 Small-cap Stocks To Buy is originally published on Insider Monkey.