Nvidia has garnered significant attention for its role in the artificial intelligence (A.I.) revolution, delivering impressive returns of 1,904% over the past five years. However, lesser-known companies like cosmetics firm e.l.f. Beauty and cloud computing company Super Micro Computer have outperformed Nvidia in terms of stock returns, with e.l.f. Beauty achieving a return of 2,491% and Super Micro Computer delivering a remarkable return of 4,175% over the same period. Similarly, energy drink maker Celsius Holdings boasts an impressive return exceeding 5,300% over the past five years.
Despite their remarkable performance, these companies have not received as much media coverage as Nvidia. While Nvidia has ascended to become the third-largest stock in the S&P 500, trailing only Microsoft and Apple, e.l.f. Beauty, Super Micro Computer, and Celsius Holdings remain outside the ranks of the market’s largest 500 companies. Consequently, they receive less media attention and are less likely to be included in portfolios centered around large-company stock indexes like the S&P 500.
These companies fall within the mid-cap segment of the market, characterized by market capitalizations that classify them as mid-sized firms. According to analysts at S&P Dow Jones Indices, mid-cap stocks have historically outperformed large-cap stocks over various timeframes, making them an attractive investment option. This segment is often referred to as a “sweet spot” in the market, offering potential for growth and outperformance, particularly during both bullish and bearish market conditions.
Smaller stocks often outperform larger ones due to their growth potential. A smaller company may need to increase its stock price by a smaller margin to realize significant returns compared to a larger, more established company. For example, a $1 stock needs to reach $4 for a 300% return, which may be more achievable for a smaller company than for a giant like Microsoft.
Investors looking to enhance long-term returns are encouraged to diversify into small- and mid-cap stocks, especially if their portfolios are heavily concentrated in large stocks. Diversifying across companies at different stages of growth allows investors to participate in the full spectrum of the economy, from budding startups to industry titans.
However, investing in individual small-cap stocks can be risky, as many startups fail to achieve significant success. Therefore, holding small- and mid-cap stocks through diversified mutual funds or exchange-traded funds (ETFs) can be a more prudent approach. While this may not yield the same sky-high returns as investing in a single big winner, it can help mitigate the risk of significant losses associated with individual stocks.
Historically, small-cap stocks have outperformed large-cap stocks over extended periods. Studies have shown that small-cap stocks outperform large firms in approximately 90% of 15-year periods. Additionally, mid-cap stocks have outperformed both large- and small-cap stocks in about 60% of 10-year periods, with lower overall volatility.
Adding small and midsize stocks to a portfolio can be achieved through total market index funds or ETFs. These funds provide exposure to a broad range of stocks, including small- and mid-cap companies. Investors can also complement their existing large-cap holdings with index funds or ETFs that track small- and mid-cap indexes to diversify their portfolio further. It’s essential to ensure that these funds track different indexes to avoid duplicating investments or leaving out potential opportunities.