Insider Monkey
15 Small Company Stocks You Should Own According to Hedge Funds
Ramish Cheema
10 min read

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In this piece, we will take a look at the 15 small company stocks you should own now. For more stocks, head on over to 5 Small Company Stocks You Should Own Now.

The business world these days is defined by the term innovation. As more and more companies offer their products and services while competing with big firms, competition grows and many find it hard to compete. At the heart of survival is innovation, since companies that improve and deliver value to customers end up gaining market share while those that are complacent go out of business.

While generally innovation is thought to be the domain of larger firms, typically, it's companies that are at the edge of an industry that ends up creating value. One of the strongest examples of the effect that small companies can have on the broader market and how that ends up affecting the share price is that of Netflix, Inc. (NASDAQ:NFLX), which was the first company to realize the value of the Internet to deliver content straight to a user's home. Netflix transitioned to a digital streaming company in 2007, when its shares were trading in penny stock territory. It gradually expanded to increase its catalog and develop its own content as well. Between 2007 and the onset of the coronavirus pandemic, Netflix, Inc. (NASDAQ:NFLX)'s share price grew by a massive 14,300% but that would only be the beginning. As the pandemic struck, and people were forced indoors, the share price proceeded to almost double and almost touched $700 per share.

At the same time, small companies that have solid fundamentals and trade on the stock market come with the added advantage of easy investing. They have low share prices, which make for an attractive entry point and provide the benefit of massive gains should the investing gods be in one's favor. For instance, while larger companies such as Apple rarely see their share prices appreciate by 50% in one year, micro cap stocks can often beat this return and yield massive returns for the savvy and careful investor. As an example, while the S&P 500's annualized returns between 1996 and 2022 sit at 9%, those for the MSCI USA Micro Cap Index sit at 9.5% over the past ten years.

More importantly, and particularly for these days when the drumbeat of a recession is in full swing, small cap stocks are shown to leave investors better off in the aftermath of a recession. For instance, research from JennisonDryden shows that one year after a recession has ended, small cap stocks post almost double the returns of their large cap partners at 34%. This of course comes with the caveat that during a recession, small cap stocks are the first ones that get hit. Not convinced? Well, you might have heard that the current economic crisis is similar to the one faced by America in the 1970s when interest rates soared to an unbelievable 14%. Guess which asset class led the return ladder during this period? According to CC&L Financial Group, it was none other than small caps that had led the market for five years starting from 1975 to 1979, going on to post as high as 53% returns and never dropping below 23%.

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