2023 started with low and declining expectations for global growth and heightened fears of a recession. However, China’s reopening, large fiscal stimulus in the United States and Europe, and the residual strength of U.S. consumers stabilized growth.

The S&P 500 staged an impressive rebound in 2023, having returned more than 20% year to date, while the Dow Jones Industrial Average and the Nasdaq Composite have risen 13% and 42%, respectively, over the same period. Meanwhile, small-cap stocks have underperformed their giant peers due to higher interest rates.

Understandably, smaller and, therefore, less-proven enterprises present higher risks as they operate on a thin profit margin and most new businesses take time to achieve profitability. Small-cap stocks are currently sitting at substantial discounts and are likely to be poised for a rebound in 2024.

Interest rates have retreated in the past few weeks, in line with market expectations of a dovish Federal Reserve announcement in December. The Federal Reserve not only maintained its pause on the federal funds rate, which was last raised in July but also disclosed its projection of anticipated rate cuts for 2024.

Small-cap stocks have witnessed a massive spike over the past week, with the Russell 2000 index surging more than 6.3% since the Fed confirmed its plans to go for at least three 25-basis point rate cuts in 2024, which could start as early as March.

Against this backdrop, investment in small-cap (market capital < $1 billion) stocks like Lakeland Industries (LAKE Quick QuoteLAKE - Free Report) , Virco Manufacturing (VIRC Quick QuoteVIRC - Free Report) , JAKKS Pacific (JAKK Quick QuoteJAKK - Free Report) , GigaCloud Technology (GCT Quick QuoteGCT - Free Report) and Hibbett Sports is likely to strengthen one’s portfolio in 2024.

Historically, small-cap stocks have been shown to outperform the rest of the market in significant part because of greater growth opportunities. Relative to bigger companies, small-cap companies show significantly higher growth potential. Most small-cap companies enjoy a larger room for future growth compared to large-cap companies, making them attractive options for investors.

Our Top Picks

We have narrowed our search to five small-cap stocks that have seen solid earnings estimate revisions for 2023 and 2024 in the past 30 days and have a VGM Score of A or B. Each of our picks sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks year to date.

Year-to-Date Performance

Image Source: Zacks Investment Research

Lakeland Industries manufactures industrial protective clothing and accessories for the industrial and public protective clothing market. LAKE is benefiting from significant contributions from the acquisition of Eagle Technical Products, which has expanded the company’s fire service protective clothing division.

An increase in direct container activity and strength in fire service and wovens product categories are expected to bolster the company’s growth. Its solid product offerings, exposure in diversified end markets, including construction, steel and chemical and focus on innovation are likely to be beneficial in the quarters ahead.

LAKE has a market cap of $131.09 million and a VGM Score of B. The Zacks Consensus Estimate for its current-year and 2024 earnings has improved 8.57% and 5% over the past 30 days to $1.14 and $1.26 per share, respectively.

Virco Manufacturing Corporation designs, produces, and distributes quality furniture for the contract and education markets worldwide. Examples of facilities served by Virco include public and private schools, colleges and universities, convention centers, federal and state institutions, churches and other businesses.

Although the company has been reeling under material cost increases and higher costs associated with materials, freight and logistics, VIRC has been witnessing higher demand as stimulus funding aids recovery in the school furniture market. Higher shipments owing to efforts to increase factory output continue to deliver high-quality, innovative equipment and furniture to schools across the United States.

VIRC has a market cap of $182.11 million and a VGM Score of A. The Zacks Consensus Estimate for its current-year and 2024 earnings has improved 20.54% and 17.01% over the past 30 days to $1.35 and $1.72 per share, respectively.

JAKKS Pacific is a multi-brand company that has been designing and marketing a broad range of toys and consumer products since 1995. It is capitalizing on its well-established global presence, emphasis on inventive approaches, and partnerships with renowned brands and film franchises.

We consider the company’s ability to successfully identify, close and integrate acquisitions to be one of its primary competitive advantages. Meanwhile, it has collaborations with Disney, Skechers, Nickelodeon, Cabbage Patch Kids and Chico to manufacture toys and merchandise related to these brands. JAKK focuses on expanding its reach to include prominent accounts such as Macy's and Amazon in the United States and Sainsbury's in the U.K.

JAKK has a market cap of $349.04 million and a VGM Score of A. The Zacks Consensus Estimate for its current-year and 2024 earnings has improved 2.13% and 0.88% over the past 30 days to $5.28 and $4.57 per share, respectively.

GigaCloud Technology provides end-to-end B2B e-commerce solutions for big parcel merchandise worldwide. The platform, known as the “GigaCloud B2B Marketplace,” integrates everything from product discovery, payments and messaging portals, leveraging channel diversification for suppliers, while resellers gain access to thousands of products backed by a complete logistics package.

The company is benefiting from a cross-border fulfillment network optimized for large parcel products with warehouses operating in four countries across North America, Europe and Asia. GigaCloud operates 21 warehouses totaling over four million square feet of storage space globally, 14 of which are located in the United States.

GCT has a market cap of $606.61 million and a VGM Score of A. The Zacks Consensus Estimate for its current-year and 2024 earnings has improved 13.87% and 17.72% over the past 30 days to $1.77 and $1.96 per share, respectively.

Hibbett, previously known as Hibbett Sports, has evolved its offerings from sports goods to an athletic-inspired fashion-focused assortment. Its new corporate identity better reflects such transition and also highlights its consumer-centric Toe-to-Head focus that caters to trending footwear as well as establishes cross-category connectivity with apparel and accessory offerings.

The company has been gaining from its e-commerce efforts and store expansion initiatives. Also, the smooth execution of its business strategies, with the effectiveness of its approach in a challenging retail environment, has been yielding.

HIBB has a market cap of $821.9 million and a VGM Score of A. The Zacks Consensus Estimate for its current-year and 2024 earnings has improved 11.54% and 5.23% over the past 30 days to $8.16 and $8.85 per share, respectively.