- Bank of America says economically sensitive small-cap stocks are surprisingly cheap.
- Strategist Jill Carey Hall says those companies should outperform as the economy recovers.
- Smaller companies have been on a tear since Nov., but defensives are trading at higher valuations.
- Visit the Business section of Insider for more stories .
While investors have piled into small-company stocks at a furious pace over the last couple of months, in some ways they're surprisingly hesitant.
Historically, those smaller stocks have tended to do better than larger ones as the economy comes out of recession and a new bull market begins. That's been the case lately, but Bank of America strategist Jill Carey Hall says valuations show that many investors are taking an overly cautious approach.
"Small cap cyclical sectors do not appear to be pricing in the recovery, trading at/near record discounts to defensive sectors," wrote Carey Hall, an equity and quantitative strategist. "With our economists' forecast for 6% US GDP growth (strongest since 1984), we see smaller stocks as a better way to invest in the economic rebound than larger stocks."
Carey Hall says the economy has moved from the early stages of a recovery into the middle stages of the cycle. That's still a period where small cap, risk, and value factors should work well. And confirming that thesis, she says risk factors were the best way to outperform in January.
She adds that today, there's also reason to believe smaller and less-expensive stocks are underappreciated.
"Low Price has tended to outperform in small caps for ~16 mos. (and by ~50ppt) following market troughs (vs. outperformance for less than a year/~30ppt today, suggesting potential for further upside)," Carey Hall wrote.
With those ideas in focus, Carey Hall names these companies as top picks. They're all "Buy" rated and rank in the top 20% of the Russell 2000 based on their sensitivity to US GDP. They are also among the cheapest 40% of Russell 2000 stocks based on their valuations as measured by either price-to-book ratio, forward price-to-earnings ratio, or enterprise-value-to-sales ratio.
Those stocks are ranked from lowest to highest based on how much further they have to rise to meet Bank of America's 12-month price targets. Those figures were calculated based on Friday's closing prices as a way of showing how much upside the stocks could have.
Via PakApNews