In a world where financial news cycles are dominated by large-cap stocks and high-profile corporate giants, we recently shed light on a different investment avenue—small-cap stocks that carry significant upside potential. Specifically, we delve into DoubleDown Interactive Co., Ltd. (NASDAQ: DDI), examining its position against other promising small-cap stocks.

As the market landscape becomes increasingly competitive, with investors often flocking to established large-cap companies, it's critical to pause and evaluate whether these stocks genuinely provide the best returns on investment. In fact, small-cap stocks often present an attractive alternative for those seeking to diversify their portfolios and mitigate risks associated with market downturns. Francis Gannon, Co-Chief Investment Officer at Royce Investment Partners, articulates this sentiment well: “Small-cap stocks are a ‘forgotten’ group that present lucrative opportunities for investors seeking diversification amid market uncertainties.”

To understand the allure of small-cap stocks, we must first define them. Typically characterized by a market capitalization ranging from $300 million to $2 billion, these stocks, while generally more volatile, have historically shown a remarkable ability to outperform their larger counterparts. This trend was notably observed during the tech bubble of the late 1990s, when large-cap stocks reigned supreme until the bubble burst in March 2000, making way for small-cap companies to shine brightly.

However, it’s essential to understand that a stock's performance is influenced by a myriad of factors, including both macroeconomic conditions and company-specific dynamics, rather than merely its market capitalization. Since many small-cap stocks fly under the radar of mainstream analysts, they often remain undervalued, providing an excellent opportunity for informed investors to capitalize on potential growth.

The growth potential inherent in small-cap stocks is a major draw for analysts and investors alike. Due to their early-stage nature, these companies frequently experience substantial room for growth, leading to potential booms in stock prices. Additionally, the volatility associated with small-cap stocks presents opportunities for short-term trading and significant price fluctuations, allowing investors to make gains when timing the market effectively.

Moreover, many small-cap companies operate within specialized or niche markets, which can lead to unique business models that intrigue analysts and investors. Should these companies succeed, they can deliver impressive returns. Furthermore, these stocks are often viewed as prime candidates for mergers and acquisitions, with analysts closely monitoring them in anticipation of potential buyouts, which typically drive share prices higher.

A report from John Hancock Investment Management offers compelling insights into the performance of small-cap stocks. It indicates that, historically, these stocks have yielded higher average returns than their large-cap counterparts. This research emphasizes that small-cap stocks tend to function effectively within diversified portfolios, often exhibiting different behavior compared to large-cap stocks. The study also highlights the existence of size premiums in the U.S. market, particularly referencing the historical performance of the Fama/French U.S. Small and Large Cap portfolios. Notably, the findings show that since the 1920s, small-cap stocks have consistently outperformed large-cap stocks.

Additionally, a 2020 study conducted by Invesco revealed an intriguing trend: small-cap stocks outpaced large caps during four recent recessions, succeeding in all but one of the following 1- and 3-year periods. This data suggests that small-cap stocks may offer a robust avenue for investment, especially in uncertain economic times.