The 2 Top Small-Cap Stocks to Buy for 2023

The stock market has witnessed significant volatility this year due to economic and geopolitical headwinds. Record high inflation, the Fed’s persistent interest rate hikes, and the recession fear primarily dampened investor sentiment.

While worries about a potential downturn have been rising, Matt Schoeppner, senior economist at U.S. Bank, believes that despite real GDP being flat, the U.S. economy might avoid a recession in the upcoming term. Also, the Inflation Reduction Act is expected to reduce prices to a great extent and help improve consumer sentiment.

Rena Conti, an associate professor at Boston University's Questrom School of Business, said, "This is going to be game-changing." Moreover, despite fluctuating consumer behavior and an uncertain outlook, small-cap companies are expected to perform better.

Given the backdrop, top small-cap stocks Yelp Inc. (YELP) and Ingles Markets, Incorporated (IMKTA) could be ideal buys for 2023.

Yelp Inc. (YELP)

YELP operates a platform that connects consumers with local businesses in the United States and internationally. The company's platform covers various regional business categories. Its market capitalization is $1.86 billion.

On November 3, 2022, David Schwarzbach, YELP's CFO, said, "As advertisers and consumers continue to navigate a complex macro environment, we believe our mission of connecting people with great local businesses is even more relevant."

YELP's forward EV/Sales of 1.31x is 29.1% lower than the industry average of 1.85x, while its forward EV/EBITDA of 5.82x is 25.1% lower than the industry average of 7.77x.

Its trailing-12-month gross profit margin of 91.25% is 81.4% higher than the industry average of 50.32%. Its trailing-12-month ROTA of 3.82% is 66.3% higher than the industry average of 2.30%.

For the third quarter that ended September 30, 2022, YELP's net revenue came in at $308.89 million, up 14.8% year-over-year. Its services revenue came in at $180.96 million, up 15% year-over-year. Also, its advertising revenue came in at $293.66 million, up 14.3% year-over-year.

YELP's revenue and EPS are estimated to increase 15.5% and 8% year-over-year to $1.19 billion and $0.54, respectively, for 2022. It surpassed EPS estimates in three of four trailing quarters. Over the past six months, the stock has gained marginally to close the last trading session at $26.68.

YELP's POWR Ratings reflect its promising outlook. It has an overall B rating representing a Buy in our POWR Rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

YELP has an A grade for Value and Quality. It is ranked #3 out of 59 stocks in the Internet industry. Click here to see the additional POWR Ratings for YELP (Growth, Momentum, Stability, Sentiment).

Ingles Markets, Incorporated (IMKTA)

IMKTA operates a chain of supermarkets in the southeast United States. It offers food products, non-food products, and private-label items. Its market capitalization is $1.86 billion.

IMKTA's trailing-12-month EV/Sales of 0.39x is 77.3% lower than the industry average of 1.70x. Its trailing-12-month Price/Sales of 0.33x is 71.4% lower than the industry average of 1.14x.

Its trailing-12-month ROCE and ROTC of 24.32% and 13.46% are 124.5% and 118.3% higher than the industry averages of 10.84% and 6.17%, respectively.

IMKTA's total retail revenues came in at $5.48 billion for the year ended September 2022, up 13.3% year-over-year. Its grocery revenues came in at $1.94 billion, up 10% year-over-year. Moreover, its net income came in at $272.80 million, up 9.3% year-over-year, while its EPS came in at $14.36, up 12.8% year-over-year.

Street expects IMKTA's revenue to increase 3% year-over-year to $4.84 billion in 2024. Its EPS is expected to rise 14.5% per annum for the next five years. The stock has gained 10.5% year-to-date to close the last trading session at $97.64.

IMKTA has an overall A rating, which equates to a Strong Buy in our proprietary rating system. In addition, it has an A grade for Quality and a B for Value and Stability.

IMKTA is ranked first among 39 stocks in the A-rated Grocery/Big Box Retailers industry. Click here to see IMKTA's Growth, Momentum, and Sentiment ratings.

YELP shares were trading at $25.77 per share on Tuesday morning, down $0.91 (-3.41%). Year-to-date, YELP has declined -28.89%, versus a -19.15% rise in the benchmark S&P 500 index during the same period.

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.

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