Small-cap stocks have always occupied a strange place in the investment world. They are often overlooked during the good times and heavily punished during the bad.
For those with patience and a strong stomach, small-caps present some of the best opportunities in the market. Right now, they’re offering more opportunity than they have in years.
The sharp shifts we’re seeing in the global economy are making life difficult for many investors. Bond markets are flashing warnings. Tariffs are swinging back and forth with every political headline. Economic confidence, particularly in places like the US, is shaky at best. Against this uncertain backdrop, small-cap stocks have been hit harder than most. Indices like the Russell 2000 have underperformed their large-cap counterparts dramatically.
But there’s a catch: the indiscriminate selling is opening the door for some incredible bargains. Many small, well-run businesses have been thrown out with the bathwater. Share prices have fallen to levels that don’t reflect the underlying health or future prospects of these companies. In some cases, it’s not just a slight mismatch — it’s an outright disconnect between price and value.
One of the advantages of small caps is their ability to move quickly. They’re often founder-led, niche-focused, and less burdened by layers of bureaucracy. In challenging economic conditions, these traits become critical. Management can pivot, costs can be cut, and new opportunities can be seized with speed that larger organisations can only dream of.
Yet despite these advantages, many investors shy away from small caps during turbulent times, preferring the perceived safety of mega-cap giants. It’s an understandable instinct, but historically it’s been during these periods of neglect that small-cap investing has offered the best rewards. Buying when others are fearful remains one of the most powerful edges an investor can have.
Picking Carefully in a Target-Rich Environment
Of course, this isn’t a strategy that works by throwing darts. Rigorous due diligence is essential. Not all small-caps are created equal. Some have strong balance sheets, committed management teams, and business models with genuine competitive advantages. Others are little more than speculative punts that will struggle to survive if credit conditions tighten further or if economic growth slows.
At Forager, the investment team leans heavily into that distinction. They spend time digging into companies that can weather a prolonged period of uncertainty — businesses with minimal debt, clear paths to profitability, and products or services that people continue to need regardless of where we are in the economic cycle. It’s an approach that demands patience and a long-term mindset, but in environments like this one, those are exactly the qualities that generate outperformance over time.
The other key advantage in the small-cap space right now is the lack of analyst coverage. Many of these companies are flying completely under the radar. That creates pricing inefficiencies that just don’t exist at the large end of the market, where every announcement is instantly digested and priced in by thousands of sets of eyes. In contrast, in the small-cap world, good news can go unnoticed for months, giving investors who do the work a serious edge.
While volatility is likely to continue, particularly with political uncertainty in the US and ongoing trade tensions, Forager views it as an opportunity rather than a threat. We expect a bumpy road ahead, but are positioning our portfolios accordingly: focused, disciplined, and ready to take advantage when opportunities arise.
This article was published with the permission of Forager Funds Management
