Small stocks are hot; they've been leading the stock market run to record highs this year.

But going forward, the better opportunity might be in super-small stocks, or "micro caps," says Rod Smyth, chief investment strategist at RiverFront Investment Group.

"Micro caps are attractive on both a tactical and a strategic basis," he told clients Tuesday in a report.

Why does Smyth like the market's smallest fries? For one, they're domestically focused companies, which means they benefit more from the better economic growth in the U.S., vs. other parts of the globe.

What's more, despite posting bigger returns this year, they're selling at cheaper prices relative to earnings, compared with small caps and large caps. The Dow Jones Select MicroCap Index, which has an average market capitalization of $400 million and is up 25.9% this year, is selling at 14 times its earnings in the past 12 months.


By contrast, the Standard & Poor's SmallCap 600 Index, whose average stock has a value of $1.1 billion and is up 24.1% in 2013, is selling around 19 times earnings, says Smyth. Similarly, the large-cap S&P 500 index, which accounts for nearly 75% of the market's total value and is up 18.7% this year, is trading at a 15 P-E.

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The micro-cap index also has a "heavy" 30% weighting in financial stocks, which are gaining strength as the banking sector grows stronger along with the economy.

"We believe the micro-cap outperformance can continue," says Smyth.

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