Small-Cap Stocks to Buy as the Little Guys Crush the Big Boys

When it comes to stocks, it's easy to equate size with quality. But over the past year, smaller has been better, which means you need to be looking for small-cap stocks to buy.

In fact, the market's practically screaming that you should be putting some chips to work in the small-cap arena.

You see, the Russell 2000, an index of 2,000 small-capitalization stocks, is positively stomping the big boys. In the three months ending in July, the small cap index returned 10.7%, while the broader Russell 3000 returned a paltry 6.6%.

And in the S&P 500 Index, the small fry have beaten the big boys by almost 18% (34.7% to 16.9%) over the last 12 months.

Steven DeSanctis, small-cap strategist at Bank of America Merrill Lynch, says there is still plenty more to come. DeSanctis told The Wall Street Journal he believes the Russell 2000 index will hit 1,100 this year, up 5.7% from recent levels around 1,070.

But this latest surge isn't really new.

Since 1927, a small-cap portfolio has beaten the returns of large-caps by an average of nearly 3%.

Small-cap stocks outperform their bigger brethren for a few simple reasons. After all, they've survived the difficult startup phase, which leaves them with plenty of room to grow.

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But there are strong indications that now is an especially good time to get in on the party. Here's why…

All Stocks Are Thriving Now

There's no doubt about it, stocks have been on a roll. The broad market has more than doubled since 2009. The S&P 500 has soared a whopping 144%.

"Should this bull market continue into its sixth year (March 9, 2014-March 9, 2015), then history says, but does not guarantee, that small caps could see a late-stage surge and outpace large caps once again," wrote Sam Stovall, chief equity strategist at S&P Capital IQ in a recent note to clients. That means it's a good idea to look beyond the big industrial giants for good returns.

And small-cap stocks to buy are not hard to find – three out of four publicly listed stocks are below $500 million in market cap.

What's more, since 2008-2009, many of the investment banking firms that cover the small-cap sector have reduced headcount. That means less research is available on these under-loved companies, keeping them under the radar of many institutional investors.

Most weary analysts aren't about to spend precious hours researching a company that no one follows. So in-the-know investors buying small caps face a lot less competition when trying to pick up shares at a good price.

But when a small outfit begins to show sizzling earnings growth and fundamental improvements, the big guys tend to take notice.

That's when you want to be in a small-cap stock – when that buying pressure hits a relatively small company, the stock can skyrocket.

Yet there's still another reason why now is a good time to be hunting for small cap stocks to buy…