Small-cap stocks tend to get hit harder during a downturn and rise faster during a recovery. It's why small-cap stocks are outperforming their mid-cap and large-cap brethren over the past year: Since the market collapse in March 2020 at the onset of the pandemic, small caps have gained 127%, mid caps are up 120%, and large caps added 96%.

But there's good reason to believe small caps will continue to perform well and July is a great time to buy them.

An acorn

From tiny acorns grow mighty oaks. Image source: Getty Images.

Opening new doors to opportunity

While the economy really began opening late last year it wasn't until relatively recently that almost all businesses everywhere were allowed to function near normal. Even cruise ship operators are now allowed to sail again, with the travel and tourism industry having been one of the most oppressed during the COVID-19 outbreak.

This could be the real summer of recovery, so long as the government doesn't step in to upset things again, meaning the gains already enjoyed by small-cap stocks were just the first phase of their growth. Additional expansion opportunities are immediately ahead.

Here are three small-cap stocks that investors should consider buying in July.

A person hooking up a hose to a storage tank.

Image source: Duluth Holdings.

1. Duluth Holdings

Work apparel maker Duluth Holdings (NASDAQ:DLTH) is developing a reputation for quality goods that are just as sturdy as rival Carhartt's. And a year on from the coronavirus outbreak, sales are returning in earnest.

Revenue jumped 21% in Duluth's fiscal first quarter and the company readily returned to profitability. And that makes sense. An economy that's reopening is going to need workers to do the jobs that have been on hold and those workers are going to need clothing and gear to wear.

Moreover, because Duluth also makes outdoor gear, not just job-related apparel, consumers are choosing to go with a brand they know and admire. With all of its stores open again, retail sales surged 92%, going up against easy comparables from last year when its stores were closed for half the quarter. But even compared to 2019, sales were 17% higher.

Even its e-commerce platform saw sales increase despite extremely difficult comps since almost all of Duluth's business was being done online.

The retailer's stock hit an all-time high of almost $21 per share at the end of June before easing a bit this past week, and remains 182% above where it was trading a year ago. At just a fraction of its sales and projected earnings growth, and going only for a bargain-basement seven times the free cash flow it produces, Duluth Holdings still holds enormous potential.

A person laying on a giant bean bag chair.

Image source: Lovesac.

2. Lovesac

Modular furniture maker Lovesac (NASDAQ:LOVE) is not a stock you'd expect to see in a list of growth stocks because it's, well, a furniture company. That's not quite the sexy sort of business that gets the juices flowing, but its business model keeps customers coming back for more.

Unlike other furniture companies, Lovesac's innovative "sactionals" help consumers meet their seating requirements as their needs grow. Upgrading from apartment seating to a piece for a house is easy by simply buying and adding on new sections. There are also hundreds of cover options to choose from, ensuring they can match almost any taste.

Fiscal first-quarter sales last month jumped 52.5% from the year-ago period. Like Duluth, its physical stores faced closures last year, a death knell for traditional furniture companies that rely upon foot traffic for sales, but Lovesac made the transition to online retailer relatively easily, while offering consumers options for pop-up shops and shops within shops as well.

Lovesac is pricier than the clothing retailer but Wall Street is still seeing long-term growth for its business. Analysts forecast the stock will be growing earnings at a rip-snorting 30% rate each year for the next five years.

Its stock is up 145% over the last 12 months even though it's down 26% from the highs it hit in June. That pullback gives investors a chance to buy into this small-cap growth stock at a better price than they otherwise could have.

A lab technician studies a sample.

Image source: Getty Images.

3. Vaxart

Vaxart (NASDAQ:VXRT) went from virtual penny stock to market darling on the strength of the promise of it developing an effective oral vaccine for COVID-19. While that's what gets most of the attention, for obvious reasons, the clinical-stage drug developer actually has numerous therapies in the pipeline.

Unlike other vaccine developers, Vaxart's treatments, whether for COVID-19 or other maladies, are oral recombinant vaccines, meaning you don't need to get a shot. Considering the numbers for people getting vaccinated are falling well short of expectations, a tablet would undoubtedly be an easier sell than a shot for many people. 

The biotech scam Theranos was built around the fear many people have of getting an injection, which only serves to underscore the tremendous opportunity Vaxart's oral vaccines hold. Analysts certainly believe it holds gigantic potential, with Wall Street thinking it can double in value over the next year.

Of the three stocks recommended, Vaxart may be the riskiest, as plenty of therapies from early-stage drug development companies that look promising fail to meet their end goals. It may be too early to call it a winner just yet, but this is a stock investors should keep on their radar.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.