Small-Cap Rotation Strategy: Five Overlooked Opportunities Emerging as Investors Exit Overheated Tech

The Macro Case for Small Caps in 2026

The Russell 2000 has delivered impressive returns through 2025, gaining approximately 11% year-to-date as of mid-December. However, many market observers recognize that this momentum masks a deeper shift occurring beneath the surface. Institutional investors are increasingly reassessing their concentration in mega-cap technology stocks, particularly the so-called Magnificent 7 that have dominated market gains. This rotation creates a compelling thesis for small-cap equities, many of which trade at depressed valuations after underperformance in recent years. Analysts broadly anticipate that 2026 will represent a meaningful inflection point for this asset class, as capital flows diversify away from stretched tech valuations.

Industrial Play With Dividend Credentials: Gorman-Rupp

Gorman-Rupp Co. (NYSE: GRC) exemplifies the type of overlooked industrial name that could benefit from portfolio rebalancing. The company manufactures and distributes specialized pump systems for diverse commercial applications, positioning it at the intersection of infrastructure demand and industrial modernization.

The stock has performed admirably in 2025, advancing roughly 29%, yet consensus analyst forecasts suggest the upside story is only beginning. Earnings are projected to accelerate at a 13.6% clip over the next 12 months, while the median price target implies potential 19% appreciation. Beyond the growth narrative, GRC carries additional appeal through its dividend profile. With a yield hovering near 1.57%, the company has achieved elite status as a Dividend King—maintaining consecutive annual dividend increases for 52 years. This combination of secular growth and shareholder-friendly capital allocation creates a compelling risk-reward proposition for income-oriented investors willing to venture beyond large-cap stalwarts.

Semiconductor Ecosystem Play Poised for Recovery

Ultra Clean Holdings Inc. (NASDAQ: UCTT) provides critical consumables and specialized equipment that enable semiconductor manufacturing. Think of the company as providing picks and shovels to an industry experiencing robust cyclical demand. Despite a challenging 2025—with shares down over 29% amid disappointing revenue and earnings—recent momentum offers an encouraging signal.

The stock has rebounded approximately 12% over the last month, hinting at potential inflection. More significantly, the analyst community forecasts extraordinary 98% earnings growth in the coming 12 months, suggesting the semiconductor super-cycle retains considerable runway. The consensus price objective of $33.33 implies roughly 30% upside, though this may understate the opportunity given the magnitude of expected profit expansion. This beaten-down equity merits consideration for investors comfortable with cyclical exposure.

Water Infrastructure Specialist Positioned for Permian Basin Expansion

Select Water Solutions Inc. (NYSE: WTTR) operates in the niche but expanding market of water management solutions for energy producers, particularly those operating in the prolific Permian Basin. The thesis centers on structural tailwinds as upstream operators increasingly prioritize sophisticated water midstream infrastructure alongside production activities.

The equity has struggled this year, declining 20.7% through December, a dislocation that obscures longer-term gains: investors who held over five years have accumulated nearly 150% returns. Forward-looking analysts project earnings growth exceeding 25% annually, underpinned by rising capital expenditure deployment across the energy sector. With a consensus price target of $14 representing nearly 30% upside potential, the valuation suggests the market has not fully priced the structural demand acceleration for water solutions.

Security Technology With Expanding Revenue Recurring Model

Evolv Technologies Inc. (NASDAQ: EVLV) develops artificial intelligence-powered security screening platforms that seamlessly integrate into existing checkpoint infrastructure. The flagship offering, Evolv Express, permits unrestricted pedestrian flow through security zones without conventional friction points—eliminating queues, pocket-emptying requirements, and footwear removal protocols.

The stock has surged more than 80% in 2025, and even after this appreciation, analyst consensus points to 24% additional upside. A pivotal catalyst involves the company’s strategic pivot away from distributor channels toward direct-to-customer fulfillment, a transition expected to substantially expand annual recurring revenue (ARR). With ARR already growing at a vigorous 25% pace, this business model evolution could materially reaccelerate profitable growth trajectories.

Consumer Discretionary Turnaround: Legacy Footwear Manufacturer

Wolverine World Wide Inc. (NYSE: WWW) operates one of footwear’s most storied multi-brand portfolios, encompassing Merrell, Saucony, Hush Puppies, and Keds. The conglomerate recently earned recognition as Company of the Year from Footwear News, reflecting the resurgence of its Saucony division among performance-focused runners. While the equity remains down 14% year-to-date, it has recovered 21% over the past 30 days after touching multi-year lows during the summer.

Analysts identify 23% upside potential, supported by projected earnings expansion of approximately 29%. The combination of brand momentum, operational improvement, and valuation reset positions WWW as a compelling turnaround candidate within the depressed consumer discretionary complex, appealing to opportunistic investors seeking contrarian positioning as sentiment gradually normalizes.

Capturing Rotation Opportunities

The five companies detailed above represent distinct expressions of a coherent investment thesis: as capital redeployes from concentrated mega-cap tech exposure toward diversified small-cap opportunities, several overlooked names offer compelling risk-adjusted return profiles. Each company demonstrates either structural growth acceleration, cyclical recovery potential, or franchise improvement—the building blocks of alpha generation for 2026.