A comprehensive research report released by John Hancock Investment Management delves into the performance dynamics of small-cap stocks, revealing a historical trend that many investors may find intriguing. The report emphasizes that small-cap stocks have historically generated higher average returns compared to their larger-cap counterparts. It suggests that small-cap stocks not only play a significant role in creating diversified portfolios but also exhibit behaviors that differ greatly from those of large-cap stocks.

The study meticulously examined the concept of size premiums within the U.S. equity market, with a particular focus on the historical performance metrics derived from Fama/French U.S. Small and Large Cap portfolios. The findings are striking: since the 1920s, small-cap stocks have consistently outperformed large-cap stocks. Supporting this narrative, a separate study conducted by Invesco in 2020 highlighted that small-cap stocks had outpaced large-cap stocks during the aftermath of four recent recessions, with superior performance noted in all but one of the subsequent 1- and 3-year periods.

Due to their potential for substantial growth, analysts have a favorable outlook on small-cap stocks. The early stages of growth often associated with these businesses present considerable opportunities for stock appreciation. Moreover, the inherent volatility of small-cap stocks can be advantageous for investors willing to engage in short-term trading, as it allows them to capitalize on price fluctuations. Many small-cap companies operate within specialized or niche markets, often leveraging unique business models that can yield significant returns if successful. Additionally, small-cap stocks frequently become targets for mergers and acquisitions, which is another factor driving their appeal. Analysts closely monitor these stocks for possible buyout opportunities, which can lead to premiums in share prices.

Small-cap stocks are defined by their market capitalization, which typically ranges between $300 million and $2 billion. While they are often viewed as more volatile and risky investments, historical data suggests that they have outperformed large-cap stocks on numerous occasions. A notable example occurred during the tech bubble of the late 1990s when large-cap stocks dominated investor interest until the bubble burst in March 2000. In the aftermath, many small-cap companies emerged with stronger performances.

Ultimately, the performance of any stock, whether large-cap or small-cap, is influenced more by the prevailing macroeconomic and microeconomic conditions rather than size alone. Small-cap stocks, often overlooked by analysts, tend to be undervalued, thus presenting excellent investment opportunities with potential for robust returns.

As the market frenzy often centers on larger-cap powerhouses, investors must take the time to evaluate if the stocks they are pursuing are genuinely worth the investment, or if they could be missing out on the potential high-growth prospects that small-cap stocks may offer. Francis Gannon, Co-Chief Investment Officer at Royce Investment Partners, highlights the importance of this consideration.

In light of this, recent publications have pointed to ten small-cap stocks with exceptional upside potential, including Krispy Kreme, Inc. (NASDAQ:DNUT). This article aims to explore Krispy Kreme's position among other promising small-cap stocks.

Choosing the right small-cap stock necessitates diligent monitoring not only of the individual stock but also its peers. Key factors that should inform investment decisions include liquidity, sensitivity to market fluctuations, financial stability, and connections to emerging technologies such as artificial intelligence (AI). The small-cap stocks selected for analysis are recognized for their high upside potential across various sectors, including finance, food, and mining.

Our Methodology
To compile our list, we utilized Finviz and Stock Analysis screeners to identify ten stocks with market capitalizations between $300 million and $2 billion. Price targets over a one-year horizon were sourced from Yahoo Finance, allowing us to assess the upside potential based on stock prices as recorded on March 28, 2025. These companies were then ranked according to their prospective upside potential.

At Insider Monkey, our keen interest lies in the performance of hedge funds and the stocks they favor. Research has consistently shown that mirroring the top stock selections of successful hedge funds can lead to superior market performance. Our quarterly newsletter follows a strategy that selects 14 small-cap and large-cap stocks each quarter, boasting an impressive overall return of 373.4% since May 2014, significantly outperforming its benchmark by 218 percentage points.

Is Krispy Kreme, Inc. (DNUT) a Small-Cap Stock with Significant Upside Potential?
An employee at a grocery store expertly decorates doughnuts with vibrant icing.

Krispy Kreme, Inc. (NASDAQ:DNUT) is a renowned American multinational that specializes in producing and selling a variety of doughnuts, including classic glazed, icing-topped, and filled options. Additionally, the company offers beverages and ice creams, along with catering and delivery services throughout the United States, Asia, and Europe. Krispy Kreme is dedicated to delivering what it claims to be the best doughnuts in the world on a daily basis, positioning itself as a prime investment with significant upside potential.

The stock has attracted considerable investor interest following news of a partnership with fast-food giant McDonald’s Corporation. Recent earnings reports indicate that Krispy Kreme's Points of Access (PoAs) experienced a remarkable year-over-year growth of approximately 34% in the last quarter of FY2024, culminating in 9,951 PoAs within the U.S. alone. The company has ambitious plans, aiming to reach as many as 15,000 PoAs by FY2026, with McDonald's slated to host around 40% of these locations.

Moreover, Krispy Kreme has made notable strides in recent years, including divesting a majority stake in Insomnia Cookies and expanding its reach with national distribution partners. Joshua Charlesworth, the President and CEO of DNUT, shared insights into the company’s growth strategy, stating, "In 2025, we expect to continue our U.S. expansion with national partners, both existing and new. For example, Costco. An added benefit of this expansion with national partners is the opportunity to identify and close existing underperforming doors, which we expect to do in 2025." This expansion strategy is further underscored by the company's move into Brazil through a partnership with Ipiranga’s AmPm, employing a capital-light franchise strategy—an approach considered pivotal in tapping into a lucrative market segment.

Analysts project one-year price targets for Krispy Kreme at $17.50 on the high end and $6 on the low end, underscoring its status as a stock with significant upside potential. Overall, DNUT ranks fifth on our list of small-cap stocks with impressive growth prospects. While there is considerable optimism surrounding DNUT, it is important to note that we believe AI stocks may offer even more substantial returns in a shorter timeframe. In fact, a particular AI stock has surged since the start of 2025, contrasting with many popular AI stocks that have seen declines of around 25%. For those seeking promising AI stocks, we invite you to check out our report on the most affordable AI stock trading at less than five times its earnings.

For further reading, consider exploring our lists of the 20 Best AI Stocks to Buy Now and the 30 Best Stocks to Buy Now According to Billionaires.