This means they have more room to improve as Covid recedes and the economy gets back to normal. They were also hit harder by the Covid-related lockdowns, in part because they usually have less diversified businesses, says Tyler Laundon, chief analyst at the Cabot Small-Cap Confidential stock letter. Next, smaller companies tend to be based in cyclical businesses, and cyclicals do better when the economy is strong, says Corbett. The margins and earnings profile will look dramatically better.вЂќ вЂњThey are behind the curve on raising prices, but they will catch up. вЂњInflation will change the dynamic,вЂќ says Corbett. Since smaller companies tend to be leaner, more of the pricing gains fall to the bottom line. First, they can raise prices, which boosts margins. Smidcap companies outperform when thereвЂ™s growth for several reasons. This includes low inventory levels that need to be raised, and strong consumer and corporate balance sheets. Reason #2: Smaller companies do better in a strong economyДespite worries about recession because the Federal Reserve will be raising interest rates, the economy will be strong this year due to various types of embedded stimulus, predicts Paulsen. Shares, on weaker-than-expected business trends and guidance. We may be seeing the beginning of that now, given the recent stunning declines in Netflix

вЂњAt some point, investors could not justify the prices anymore.вЂќ вЂњThis period reminds me of the late 1990s and early 2000s when it only made sense to buy large-cap and dot-com names,вЂќ says Corbett. Here is a visualization of what Paulsen and Corbett are talking about, from Bank of America. But they have not gotten a multiple expansion,вЂќ says Perritt Capital ManagementвЂ™s Michael Corbett, who specializes in small-cap investing. Smidcaps also trade in line with their historical valuations.Дespite this relative discount, smidcap earnings are currently going up a lot faster than large-cap earnings, says Paulsen. The smaller names of the S&P 600 trade at 14.5 times forward earnings vs. ThatвЂ™s the lowest since this ratio nearly touched 0.6 in 2000, notes James Paulsen, an economist and the chief market strategist at Leuthold. Using forward earnings, their price-to-earnings (P/E) ratio is currently around 0.7 that of larger-cap stocks. Relative to large-cap stocks, small-cap and mid-cap stocks - known in the industry as smidcaps - have only ever been cheaper once before in recent history. Here are three reasons you should consider smaller companies now, and seven names that have good potential, according to experts in the space.

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