By Jacob Sonenshine

Small-company stocks are mounting another comeback -- but there are better ways to play them than the Russell 2000.

The small-cap index, whose members have an average market value of about $4 billion, has gained 22% to 2148 from its April low, outpacing the S&P 500's 21%. The entire market got a boost when President Donald Trump rolled back the most onerous tariffs, ending the market panic caused by fears of a sudden stop in the U.S. economy.

The tariff rollback has been a particular boon for small-cap stocks, which are more economically sensitive than their larger peers -- and riskier, too -- and have had more to gain on the rebound. While the S&P 500 only needs to rise about 2% to reach its record hit earlier this year, the Russell still needs to gain another 12% to reclaim its 2442 record high, touched in November, giving it more room to run.

There's reason for some caution, however. The Russell has seen many brief periods of outperformance versus the larger, more stable S&P 500 in at least the past five years, but it can never seem to gather enough momentum to sustain the move. And even if the index can make a run at its all-time high, it might not go much further.

After a short rally late last year, the Russell ran out of steam at a price that was just a few points above its previous high set in late 2021. Aside from its November rally, it has frequently topped out at roughly 2300 since the end of 2021. That suggests that while small-caps could outperform in the short term, they're not a long-term bet.

"In our book, U.S. small-caps are now an occasional tactical trade while large-caps are a core holding," writes Nicholas Colas, co-founder of DataTrek Research.

While betting on small-caps as a group may be just that -- a bet -- there are individual stocks that look attractive, particularly with the Russell 2000 trading at just an 11% premium to the S&P 500, down from its 30% average, according to Evercore ISI data.

The firm's analysts screened for small-caps that are in the highest quintile of profitability based on net profit margins and return on equity. By doing so they avoid the many money-losing stocks in the index and find those that have businesses that have the pull with its customers to lift prices to offset tariff-related costs and protect its profit margins. They also looked for companies in the top quintile of sentiment based on the change in analyst's sales and earnings estimate revisions in the past three months.

Stocks that made the cut include Chili's owner Brinker International, LaCroix sparkling water maker National Beverage, real estate investment firm Cohen & Steers, data protection software provider Commvault Systems, and digital lender Enova International.

Another is $4.7 billion egg producer Cal-Maine Foods. The stock is down 20% from its January record high of $66, when the market realized that egg prices, which had surged because of bird flu, couldn't remain at those levels forever. Shares now trade at 10 times earnings, down from a peak this year of just over 12 times, even though sales and earnings estimates have only risen.

The stock now looks cheap -- and set up for gains. Analysts lifted egg price estimates for years, but lowered them last year as prices came back down to earth. They have since jumped. Sales estimates are up 47% since October, according to FactSet, driven partially by price expectations and partially by increased volume.

Cal-Maine also pays what looks to be a reliable dividend: Analysts expect payments of just over $250 million, or $5.23 per share, this year, covered by an expected $600 million of free cash flow. The dividend yield is over 5%.

Good things can come in small packages.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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June 13, 2025 01:00 ET (05:00 GMT)

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