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The 10 Best Small-Cap Stocks to Buy Today

These small companies have carved out economic moats, and their stocks are undervalued.

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As stocks continue to sell off in 2022, some long-term investors may be looking to put dry powder to work. After all, the stock-market swoon has led to more-reasonable stock valuations than we’ve seen in a while: Morningstar U.S. markets strategist Dave Sekera estimates that the U.S. stocks are about 12% undervalued.

Are Small-Cap Stocks a Good Investment Now?

Small-cap stocks began May about 21% undervalued according to Morningstar’s measures; large-cap stocks, meanwhile, were about 12% undervalued. Given that small-company stocks have underperformed large-company stocks so far this month, small companies as a group remain the better bargains today.

That said, small-cap stocks can be notoriously volatile and may remain so as concerns about rising interest rates and the Federal Reserve’s tightening monetary policy worry investors. Further, some would argue against buying small-cap stocks during a period of slowing economic growth: Small companies tend to underperform during such times.

We encourage long-term investors interested in small-cap stocks today to favor significantly underpriced stocks of small companies with economic moats. Generally, such companies have built structural barriers that protect them from competition—and those that are undervalued should hold up better on the downside.

The 10 Best Small-Cap Stocks as of May 2022

The 10 most undervalued small companies with economic moats on Morningstar analysts’ coverage list today are:

  1. Altice USA (ATUS)
  2. Millicom International Cellular (TIGO)
  3. Rocket Companies (RKT)
  4. Hanesbrands (HBI)
  5. Boston Beer (SAM)
  6. Asbury Automotive (ABG)
  7. Malibu Boats (MBUU)
  8. Adient (ADNT)
  9. Equitrans Midstream (ETRN)
  10. Nordstrom (JWN)

Here’s a little bit about why we like each of these small-cap stocks at these prices, along with some key Morningstar metrics for each company. All data is as of May 6, 2022.

Altice USA

  • Price/fair value: 0.37
  • Fair value uncertainty: High
  • Economic moat: Narrow
  • Moat trend: Stable
  • Industry: Telecom services

A telecommunications service provider with a foothold in competitive New York City and several rural markets, Altice has been shunned by investors: Altice stock is down 37% so far this year and a stunning 72% during the past 12 months. We expect volatility to persist, says Morningstar director Mike Hodel, thanks to Altice’s heavy debt load and an ambitious investment strategy of aggressively upgrading and expanding fiber networks. Yet we think the company possesses a strong network and is an opportunity for long-term investors. This small-cap stock is sharply undervalued, trading 63% below our fair value estimate of $28.

Millicom International Cellular

  • Price/fair value: 0.42
  • Fair value uncertainty: High
  • Economic moat: Narrow
  • Moat trend: Stable
  • Industry: Telecom services

The second telecommunications name on our list of undervalued small-cap stocks, Millicom maintains a portfolio of telecom businesses largely focused in Latin America. Though customer growth slowed during the first quarter, we expect financial performance to rebound along with economic growth. We assign Millicom a narrow moat rating, because it holds a strong market share position in most countries where it operates. Millicom stock is deeply undervalued, trading at a 58% discount to our $51 fair value estimate.

Rocket Companies

  • Price/fair value: 0.45
  • Fair value uncertainty: High
  • Economic moat: Narrow
  • Moat trend: Stable
  • Industry: Mortgage finance

Rocket Companies offers several products and services but is best known for its Rocket Mortgage segment; this small company has distinguished itself by operating as an entirely digital lender. Investors have clobbered Rocket Companies' stock as interest rates have risen and mortgage refinance activity has stalled. But we think the company remains in a strong competitive position. This small-cap stock is deeply undervalued according to our metrics, trading 55% below our fair value of $19.

Hanesbrands

  • Price/fair value: 0.48
  • Fair value uncertainty: Medium
  • Economic moat: Narrow
  • Moat trend: Stable
  • Industry: Apparel manufacturing

Higher costs, freight delays, and unfavorable currency movements are likely to sting Hanesbrands for the remainder of 2022, says Morningstar analyst David Swartz. We nevertheless think this stock is very attractive for long-term investors, trading 52% below our $26 fair value estimate. Hanesbrands is the market leader in basic innerwear across various categories in the United States and elsewhere, which allows this small company to enjoy strong retail distribution and premium pricing.

Boston Beer

  • Price/fair value: 0.50
  • Fair value uncertainty: Medium
  • Economic moat: Narrow
  • Moat trend: Stable
  • Industry: Beverages–brewers

Rampant supply chain and input cost inflation crushed Boston Beer’s margins during the first quarter, and investors have crushed Boston Beer stock, too. Today this small-company stock trades at about half what we think its worth: 50% below our $740 fair value. Boston Beer is positioned well to boost market share with new product launches, says Morningstar senior analyst Jaime Katz, and this small company has boasted a meaningful growth profile that mainstream beer lacks.

Asbury Automotive

  • Price/fair value: 0.51
  • Fair value uncertainty: High
  • Economic moat: Narrow
  • Moat trend: Stable
  • Industry: Auto & truck dealerships

Unlike many of the small-company stocks featured here, Asbury Automotive stock has been on a tear in 2022, up more than 10% for the year so far. We think the stock has plenty more gas in the tank. A regional collection of automobile dealerships, Asbury Automotive is one of the best operators in the space, says Morningstar strategist David Whiston. And the stock is significantly undervalued, trading 49% below our $377 fair value estimate.

Malibu Boats

  • Price/fair value: 0.52
  • Fair value uncertainty: High
  • Economic moat: Narrow
  • Moat trend: Stable
  • Industry: Recreational vehicles

A leading designer of powerboats in the U.S., Malibu Boats has enjoyed strong demand thanks to its innovative products and high-quality brand. In fact, this small company has used its brand strength to expand into adjacent categories, such as trailers and accessories, says Morningstar senior analyst Jaime Katz. But an economic slowdown could stall sales of big-ticket items like the boats Malibu manufactures. Nevertheless, Malibu Boats stock is attractive for long-term investors, trading 48% below our $100 fair value estimate.

Adient

  • Price/fair value: 0.53
  • Fair value uncertainty: Very High
  • Economic moat: Narrow
  • Moat trend: Stable
  • Industry: Auto parts

Supply chain shortages and cost inflation continue to hamper the leader in the global automotive seating market, weighing on this small-cap stock's price. Adient stock is undervalued by 47% relative to our $64 fair value estimate. We still like this small company long term: Seating is one of the stickiest parts of the supplier sector, and automakers need suppliers that can consistently deliver high-quality seats in a just-in-time system, says Morningstar strategist David Whiston. Adient’s scale makes the company well-positioned to do just that.

Equitrans Midstream

  • Price/fair value: 0.55
  • Fair value uncertainty: High
  • Economic moat: Narrow
  • Moat trend: Stable
  • Industry: Oil & gas midstream

The biggest challenge facing this Appalachia-focused midstream company is getting its Mountain Valley Pipeline into service in the second half of 2023. We think there is substantial upside to this small-cap stock as the path forward for this pipeline becomes clearer and Equitrans addresses legal roadblocks, says Morningstar strategist Stephen Ellis. The stock is significantly undervalued today, trading 45% below our $14 fair value.

Nordstrom

  • Price/fair value: 0.56
  • Fair value uncertainty: High
  • Economic moat: Narrow
  • Moat trend: Stable
  • Industry: Department stores

Nordstrom remains a top operator in the competitive U.S. apparel market, says Morningstar analyst David Swartz. In particular, we like the small company’s loyal customer base and differentiated products/services, and we think it has competitive advantages over other apparel retailers. Nordstrom stock is a bargain by our measures: It’s trading 44% below our fair value estimate of $43.50.

How to Find Top Small-Cap Stocks

As noted, we think the “best” stocks are always those that are trading well below their fair value—these stocks have sizable margins of safety. Aside from valuation, we also prefer stocks of companies that have carved out economic moats. The Morningstar Guide to Stock Investing delves deeper into our approach to choosing stocks.

Susan Dziubinski does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.