Small cap stocks that beat the S&P 500 (and how we find them)

The biggest winners in our portfolio are names most S&P 500 investors have never heard of — and that's precisely the point.

Why small caps beat the S&P 500 over time

The S&P 500 is a float-weighted index of the 500 largest U.S. companies. By definition, it owns more of what has already worked and less of what is working right now. A $3B specialty-alloys company compounding earnings at 40% a year has roughly zero weight in the index. A $3T software incumbent trading at 32x forward earnings has roughly 7%. Over long horizons that math works against you.

The academic literature has quantified this for decades. Fama and French formalized the SMB (small-minus-big) factor in 1992, showing that small-cap stocks historically delivered a premium over large caps after controlling for market beta. The Russell 2000 has beaten the S&P 500 in most rolling 20-year windows going back to the 1970s, even though the last decade has been a large-cap regime driven almost entirely by mega-cap tech. Regime changes are the rule, not the exception.

The institutional blind spot

Here is the structural edge that doesn't show up in a textbook. A $50 billion hedge fund physically cannot take a meaningful position in a $2B market-cap company. If they bought 5% of the float, it would be a $100M position — a rounding error for them and an illiquid nightmare to exit. So they don't try.

Most large sell-side banks don't cover these names either. No coverage means no earnings-day analyst debates, no price targets, no index inclusion pressure. The price discovery is worse, which cuts both ways — but for a disciplined long-term buyer, worse price discovery is opportunity. You can get great businesses at reasonable multiples because the professional money is structurally forbidden from showing up.

Individual investors and subscription services like Outpick can buy these names without moving the price. That is the entire basis for our small-cap exposure.

Three small caps from our portfolio

We'd rather show proof than make claims. Below are three small and mid-cap names we currently hold, with real entry dates and returns as of April 2026. These are live positions, not cherry-picked backtest lines.

CRS is the clearest example. Carpenter Technology makes specialty alloys for aerospace and defense — premium nickel, titanium, and stainless products with pricing power few metals companies have. When we entered in January 2024, it was a small-cap with almost no mainstream attention. Two years later, it's up nearly 5x on a combination of expanding margins, booked aerospace demand, and multiple re-rating.

IRS is an Argentine real estate holding company — emerging-market micro-cap, the kind of name most U.S. investors won't even check a quote on. We've held it since December 2022 and it is up more than 3x. For the broader Argentine macro thesis, see our piece on Argentina as the quiet engine of our best trades. AGI is our Alamos Gold position, benefiting from the broader precious-metals move covered in why gold mining stocks are outperforming the S&P 500.

What we screen for

Not every small cap is a good buy. Most are small for a reason. Our screen is narrow and the bar is high.

• Sub-$10B market cap, with a strong bias toward $1B-$5B where coverage is thinnest
• Accelerating earnings and expanding margins over the trailing 4-8 quarters — we want a business that is getting better, not just cheaper
• Founder-led or owner-operator where possible — skin in the game changes capital allocation
• Identifiable moat — niche dominance, regulatory barrier, process know-how, or distribution lock-in
• Fundamental tailwind — a multi-year demand story that doesn't depend on rate cuts or a specific political outcome
• Reasonable balance sheet — leverage that survives a recession, because small caps get punished first when credit tightens

The volatility tax

Here is the honest part. Small caps drawdown harder than the index. Always. Our own walk-forward backtest from June 2022 to April 2026 produced a -27.38% max drawdown in April 2025. Individual positions can be worse — 30%, 40%, sometimes more. That volatility is not a bug; it is the price of admission for the returns.

The investors who fail at small caps fail here. They buy a great business, watch it fall 35% in eight weeks, decide the thesis was wrong, and sell at the bottom. The investors who succeed accept up front that drawdowns are mechanical, not informational. A -30% move in a thinly-traded $2B name often tells you nothing about the underlying business — it tells you two funds rebalanced in the same week.

How to allocate without overdoing it

We don't recommend an all-small-cap portfolio. The right structure for most long-term investors is a core of index funds plus a satellite sleeve of high-conviction picks. The satellite is where the alpha comes from; the core keeps you sleeping at night when the satellite is underwater.

How much to allocate depends on your risk tolerance and timeline, but 15% to 40% of investable assets in an active sleeve is a common institutional range. For more on portfolio construction, see how many stocks you should hold to beat the market and how to beat the S&P 500 without becoming a day trader.

Outpick publishes one pick every two weeks — roughly 26 per year — and we hold winners for multi-year periods. You can see the live portfolio and track record on the dashboard or the public track record.