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Earnings are picking up among small-caps. Consider these under-the-radar stocks and top-notch mutual funds.

Small-company stocks are heating up, and it isn’t just because investors are growing weary of artificial intelligence.

Small-caps have vaulted ahead of the S&P 500 since last October, returning 10% versus a flat performance for the large-cap index. The gains reflect a broad shift out of the tech-heavy S&P 500 as investors look for better values and diversification from Nvidia and the AI trade. But small-caps aren’t just getting a lift from AI-related selling.

More importantly, earnings have recovered after years of declines. According to T. Rowe Price, trailing 12-month earnings for the small-cap S&P 600 index are up nearly 30% since last October, a turnaround after falling for nearly three years. That “represents a meaningful shift” for small-caps and may be a sign that deteriorating fundamentals are finally over, T. Rowe says.

Investors have been buying small-caps on prospects for lower interest rates and fiscal stimulus lifting the U.S. economy. Falling rates favor smaller companies, which tend to have higher financing costs and are more sensitive to rate moves than large-cap and megacap stocks. Interest rates have been declining and may fall more in 2026 if inflation doesn’t rear up, allowing the Federal Reserve to cut by 0.5 percentage points.

Many small-caps are domestically cyclical companies in sectors like industrials and banks. That could be a double-edged sword if the economy falters, a growing risk with energy prices rising due to the war with Iran. Year-to-date earnings estimates for the S&P 600 are down by 1.3% for 2026 profits, notes Chris Senyek, chief investment strategist at Wolfe Research. Conversely, estimates for the S&P 500 are up 1.2%, powered largely by Big Tech.

Small-caps are also highly vulnerable to “risk off” climates for stocks overall, which has been the case lately. Large-caps tend to be considered more sturdy against a backdrop of financial pressures and weakening growth.

While the near term may be choppy, though, the small-cap universe is packed with high-quality growing companies, trading at reasonable valuations. The S&P 600—an index that includes only profitable small companies—trades at 16 times forward earnings, compared with 21 times for the S&P 500.

“Small-caps have been battling this Mag Seven euphoria,” says Steven McBoyle, portfolio co-manager of the Royce Premier fund. “It has been challenging for active small-cap managers such as ourselves. But it’s important to note that investors should not forget the cycles are long and they’re on both sides.”

Small-caps tend to be less widely followed on Wall Street, creating more opportunities to find overlooked stocks. Active managers have a mixed record, but some have consistently found ways to beat the indexes.

To help navigate the sector, we worked with Envestnet and Mercer—consulting firms that vet funds for institutional investors—to help identify strong performers. We then spoke to managers about their top picks.

Here’s a look at their funds and some stocks to consider.

Managing just $150 million in CRM Small/Mid Cap Value fund, co-manager Mimi Morris and her team look for under-the-radar stocks and turnaround stories. “Frankly, we gravitate to areas that are more neglected,” she says.

The fund returned an average 11.8% over the past decade, handily beating its Russell 2500 Value benchmark, which returned an annualized 11%.

One of her picks is BankUnited, one of South Florida’s largest banks, with 55 branches mostly around Miami, Fort Lauderdale, and West Palm Beach. Lower short-term rates are lifting its net interest margins, and the company is growing its loan portfolio while moving mortgages written at ultralow rates in the early 2020s off its books.

BankUnited has a premium location—in one of the nation’s fastest-growing regions. That could make it a takeover target for a larger bank looking to enter South Florida, Morris says. Recent buyouts have been at around 1.7 times book value. BankUnited trades at 1.1 its book value.

Wall Street analysts forecast profit growth of 19% for 2026, to $4.22 a share. Shares trade at 11 times estimated profits and sport a 2.7% dividend yield.

Champion Homes, which sells manufactured and modular homes, should capitalize as home buyers look for more-affordable housing amid relatively high mortgage rates and housing costs.

The average cost of a manufactured home is $84 per square foot, compared with nearly $170 for site-built homes, according to the Manufactured Housing Institute. While the median sale price for U.S. homes is just over $400,000, the typical Champion home sells for about $100,000. Champion also sells high-end products—like its new 1,600-square-foot, three-bedroom “Emerald” model, which goes for $185,000.

Champion should benefit from housing affordability initiatives in Washington, D.C., such as zoning reform and attempts to streamline the industry’s oversight by the Department of Housing and Urban Development. One key bipartisan measure would remove a 50-year-old rule requiring manufactured homes to include a steel chassis that adds $5,000 to $10,000 to costs, a huge potential win for Champion.

Wall Street doesn’t see much earnings growth this year, but analysts expect a 12% increase in 2027 to $4.18 a share. The stock isn’t notably cheap, at 22 times estimated 2027 profits. But Morris thinks Champion is in a prime spot with its premium product lineup and potential for margins to improve as more squeezed home buyers accept trade-offs.

“They are going after the site-built buyer who is priced out,” she says. “They are doing that with a product that looks very different from what you think of as manufactured housing.”

Royce Premier / RPFIX

Run by McBoyle and his team, Royce Premier looks for companies with strong balance sheets and highly defensible businesses, preferring duopolies or oligopolies.

The fund tends to avoid highly regulated industries and companies that borrow heavily, which means few banks and utilities, and a big helping of industrials. The stance is working well; the fund is up 13.4% year to date. Long-term returns are an annualized 12.3% for the past 10 years, beating the Russell 2000’s 10.5%.

One of the fund’s classic hard-hat holdings is welding-equipment maker ESAB, which was spun off from Enovis in 2022. The company has just two other major competitors globally (Lincoln Electric Holdings and Illinois Tool Works), giving it some pricing protection. The business environment is slowly picking up, too. After 10 months of contraction, the U.S. manufacturing sector expanded in January and February, a shift that should give ESAB and other industrial cyclicals a lift, according to J.P. Morgan analysts.

Sales are expected to rise 8% this year and 5% in 2027, hitting $3 billion. McBoyle expects profits to grow faster thanks to a recent focus on higher-margin equipment like welders, over lower-margin consumables such as wires and electrodes that get used up in the welding process.

ESAB’s recent $1.5 billion acquisition of Eddyfi Technologies, a firm that sells machines to inspect aerospace, defense, and nuclear equipment, should boost growth and margins. While Wall Street expects earnings growth of 10% in 2026, McBoyle thinks that ESAB’s growth can hit midteens in the next few years, as U.S. and global infrastructure spending for things like transportation and energy projects rises steadily.

Shares trade around 20 times estimated 2026 profits of $5.82 a share, in line with the market. The stock goes for 18 times 2027 estimates of $6.48, according to consensus forecasts.

Based in Toronto, FirstService is one of North America’s largest property managers, servicing thousands of condos and apartments across the U.S. and Canada. The company also offers light repair and upgrades, and roofing work through brands like California Closets, CertaPro Painters, and Roofing Corp. of America.

First Services’ market share is less than 10% in both of its major business lines, notes McBoyle. In a highly fragmented industry, it’s one of the few players with a national network, giving it a moat against hundreds of mom-and-pop operations. “They often get the first call from insurance carriers after a large storm,” he says.

The stock has struggled in the past year, down about 16% in part because of a slowdown in its roofing business, which relies on commercial construction projects. Many of them were put on hold amid an uncertain macro environment. McBoyle sees that as a temporary problem. The company has a solid roofing backlog, and the unit represents only 12% of overall revenue.

In the property management unit, which constitutes about 40% of revenue and profits, he thinks annual growth can hit 10%, factoring in acquisitions. That stock, at about $153, trades at 25 times earnings based on 2026 forecasts. McBoyle sees it getting back to last year’s high of about $210 over the next year.

Kennedy Capital Small Cap Value / KVALX

The $73.2 million Kennedy Capital Small Cap Value punches above its weight. Its small size may be due to its relatively short track record, having launched in April 2022. Since then, it has posted an average annualized gain of 11.7%, compared with 9.4% for the Russell 2000 Value index.

Kennedy Capital Management’s chief investment officer, Frank Latuda, says he looks for inexpensive companies that efficiently turn invested capital into strong cash flows, often by reinvesting in their businesses or through acquisitions.

One pick is AZZ, a company that treats industrial metals like steel and aluminum to help protect against corrosion. Along with seeing steady industrial demand, the company is a pick-and-shovel play on the data-center and reshoring boom. Shares are up 37% in the past year.

AZZ has a large geographic network of facilities throughout the Midwest and South. Metal is heavy and costly to transport, so having a network of facilities near major construction sites is a big edge that competitors can’t easily replicate, Latuda says.

Also positive: Margins are likely to keep growing. Operating margins are now 15%, up from 10% in 2020. With a new $110 million facility opening in Washington, Mo., and customer demand picking up, those margins should continue to rise, says Latuda. “There is a lot of operating leverage,” he adds, noting that its steel-galvanizing facilities can ramp up volumes at relatively little extra cost.

Wall Street forecasts low-double digit growth in 2026 and 2027, with earnings per share rising from $6.68 to $7.36. At about 19 times 2026 estimates, the stock isn’t pricey for that kind of growth, Latuda says.

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Patrick Industries sells fixtures, sidewalls, windshields, and other non-engine parts for recreational vehicles, boats, and outdoor vehicles, as well as building supplies. It has grown rapidly by rolling up small manufacturers, such as Elkhart Composites, a maker of RV panels, and Medallion Instrumentation Systems, which produces digital controls and lighting for boats. The company’s portfolio now spans more than 80 brand-name products.

RVs, which account for just under half of total sales, are going from a drag on growth to a driver. Recent RV dealer inventories suggest that the market has bottomed. Patrick forecasts RV wholesale shipments to grow by low- to mid-single digits in 2026.

The gains should help lift profitability. The company recently hiked its 2026 operating margin forecast to 7.9% from 7% in 2025, Latuda notes. “They’ve been able to manage margins during a pretty significant downturn in the industry,” he says. “Now, as customers appear to be stabilizing, it sets Patrick up to benefit from that.”

Despite a 36% gain in the past year, the stock trades at 23 times 2026 earnings, a reasonable multiple relative to its growth rate. Wall Street forecasts roughly 20% profit growth in 2026 and 2027, with earnings per share of $5.40 to $6.42.

FullerThaler Behavioral Small-Cap Equity/ FTHSX

FullerThaler Asset Management leans on behavioral economic research from Nobel Prize winners Richard Thaler and Daniel Kahneman to find overlooked stocks. In practice, that often means zeroing in on stocks where investors have overreacted to news or missed signals like insider buying or share repurchases that telegraph investor confidence.

The $11 billion FullerThaler Behavioral Small-Cap Equity returned 14.9% over the past decade, compared with 10.4% for the Russell 2000. While that fund is closed to new investors, the firm’s Behavioral Unconstrained Equity fund boasts a similarly strong track record and is still open.

One top pick: Allison Transmission Holdings, the world’s largest maker of automatic transmissions for commercial trucks and other heavy-duty vehicles, from school buses to tanks. The company dominates the market, with more than 50% market share in certain niches, such as Class 8 trucks—a group that includes construction and dump trucks, notes FullerThaler portfolio manager Raymond Lin.

Sales fell 7% last year as trade worries ate into global commercial trucking volumes. It’s a big reason Allison trades at just 14 earnings, despite analysts forecasting 25% profit growth for 2026.

The company has plenty of attractive prospects. Sales at its defense unit surged 26% last year. In January, the company closed a $2.6 billion deal for a components business for vehicles in industries like construction and mining. Allison has said the new unit will boost 2026 earnings, even after factoring in one-time integration costs of about $70 million.

One positive for the stock: rising buybacks and insider purchases, notes Lin. The company has steadily repurchased shares, reducing its share count by 6% in the past two years. InAugust, as the stock hit lows of $89, Chief Operating Officer Frederick Bohley bought $270,000 worth of shares, a big vote of convenience. “He stepped up,” says Lin.

Primoris Services has been on a tear as an AI/data-center stock. The company builds and maintains energy infrastructure like power plants, solar farms, and transmission lines—all areas in hot demand for data-center power. Shares rose 62% last year after a 130% gain in 2024. The stock is up another 19% so far this year.

Only about 10% of the company’s revenue is tied to data centers, but FullerThaler regards it as a significant growth opportunity.

AI is just one factor driving the huge uptrend in electricity usage. Primoris CEO Koti Vadlamudi suggested on the company’s February earnings call that capital expenditure by its largest utility customers should increase 50% in the coming five years.

Projects are piling up. The company, which generated $7.6 billion in 2025 revenue, finished the year with a backlog of $11.9 billion, including $3 billion of work booked in the fourth quarter.

Primoris no secret. Wall Street expects earnings to grow 5% in 2026 and 15% in 2027. With its share price on such a tear, Primoris’ price/earnings ratio has climbed from about 16 to just under 25.

Still, FullerThaler research director Raife Giovinazzo thinks the stock can keep rising. The company has a long record of beating Wall Street’s quarterly forecasts; he counts 12 in a row. That has led to a sense of complacency among investors, he argues, with the stock falling on better-than-expected results in recent quarters. “This is a company that continues to surprise—and we think people continue to underreact,” he says.