Ben Graham popularized the "cigar-butt" style of investing.

The idea? Find businesses priced below their assets.

Like finding a cigar butt with one last puff in it.

The idea is to buy these undervalued stocks cheaply, benefit from the 'last puff' of value, and then sell them.

Cigar butt stocks are not always great businesses. But they're cheap enough to offer some upside and margin of safety.

They are also -- fun fact -- how Warren Buffett made his first million.

This style of investing almost always focuses on one sector of the economy that’s been getting hammered in 2023: small caps.

And here’s why:

Small caps are usually ignored by the news…

Ignored by the banks…

And they're often too small for the big hedge funds to buy them.

But our research suggests 2024 might be the year of the small cap comeback.

And while you could spend time hunting down the cigar butts…

Our Paradigm colleague and income maven Zach Scheidt has a better idea:

When the small cap comeback hits, you won’t need to.

Below, he gives you all the details.

Read on.

Wall Street’s Best Bargains Are On Sale

Zach Scheidt

If you're looking to boost your retirement income, it's tempting to focus solely on big, blue-chip stocks.

After all, industry titans like Coca-Cola and Procter & Gamble are known for paying stable dividends for decades.

And it’s why investing in blue-chip dividend stocks like these is one of my favorite ways to build wealth over time.

But if you want to get an edge over other investors, you need to think outside the box to find opportunities that others overlook.

You have an opportunity to do just that by investing in small-cap stocks.

And today I want to continue that discussion and show you why now is a great time to load up on these stocks.

Small Stocks Offer Huge Potential

You may have heard about the "magnificent seven," a collection of the largest mega-cap stocks that have been driving the market higher.

This list includes the biggest of the big companies like Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia, and Tesla.

Over the past few years, investors have been enamored with huge companies like these while turning a blind eye to smaller businesses on Wall Street.

Yes, many of these shareholders have been rewarded with healthy returns in an otherwise volatile market. But here's the thing...

It’s common for mega-cap stocks to go through seasons of extreme popularity. Eventually, enthusiasm falls once they get so big that they can't grow quickly anymore.

We're certainly at that point for many of the market's favorite large-cap stocks.

Meanwhile, small-cap stocks go through seasons of extreme neglect. Investors just aren't interested in buying these companies, regardless of the available value.

This essentially fits the dominant attitude on Wall Street right now. But the tide is starting to shift, and many small-cap stocks now look like incredible opportunities!

Now, small-cap stocks don’t always fit with my broader investment approach, which focuses on income.

I usually focus on mid-to-large-cap stocks and companies with long histories of paying and growing their dividends.

Many small-cap stocks don’t pay a dividend at all. And those that do usually don’t offer the kind of stability we prioritize.

But given today’s investment landscape, they’re simply too good of an opportunity to ignore.

Here are a few reasons why small-cap stocks deserve a spot in your portfolio…

3 Reasons to Load Up on Small Caps Today

First, small caps are historically cheap.

According to data from Bespoke Investment Group, many small-cap sectors currently have over 20% of stocks trading below book value.

So if investors took these companies, sold their assets, and paid off their debt, the cash would be worth more than the stock prices today.

In other words, these stocks are almost priced as if the companies were going out of business.

Admittedly, some of the companies in that boat have serious issues.

But there could be some winners among them, and the market is simply failing to recognize their intrinsic value and future profits.

Buying these stocks at fire sale prices sets you up for strong returns when the market eventually realizes its mistake.

Not only are these stocks extremely valuable (not to mention cheap) right now, but small caps are also beginning to rebound.

The Russell 2000 Index, a benchmark for small-cap stocks, dropped nearly 20% between the beginning of August and the end of October.

But it has shown impressive strength in November, rallying powerfully off its lows. As investors, it’s practically impossible to predict when a downturn will run its course.

So rather than trying to catch a falling knife, you want to see a healthy rebound before you start to invest again.

The performance of small caps so far this month confirms my sense that these stocks were oversold and due for a rebound.

With stocks still trading at dirt-cheap prices compared to their earnings potential, I believe this rally has a long way to go.

Finally, small caps help diversify your portfolio.

As I mentioned earlier, large companies have driven much of the activity on Wall Street this year. But it’s only a matter of time before investor sentiment changes.

If and when these mega-cap stocks roll over, the major indexes weighted heavily toward them will fall as well.

But if you allocate a portion of your portfolio to small-cap stocks before this happens, you’ll balance your risk and smooth out your returns.

Bottom line, small caps provide a compelling opportunity in today’s market while other investors are obsessed with mega-cap tech stocks.

Their attractive valuation, high growth potential, and diversification benefits make them one of the most promising investment opportunities heading into the end of the year.

If you’re looking to add exposure to the sector through a basket of stocks rather than individual companies, the iShares Russell 2000 ETF (IWM) is a great place to start.

And stay tuned, as we'll surely have more to say about these stocks heading into the end of the year and as we kick off 2024.