Jefferies strategist Steven DeSanctis says small-cap stocks should outperform starting in January. He put together a list of “Buy” rated steady earners that have underperformed the market this year. He says low prices, M&A activity, and the end of China’s zero COVID policy should help small caps. “Wait ’til next year” is the traditional saying of disappointed sports fans looking for solace after a loss. Jefferies says it might hold true for investors who’ve endured some tough losses in 2022.
“We see a good possibility based on when the first 11-months have been this bad, December is weaker than norm, but January is much better,” wrote strategist Steven DeSanctis in a recent note to clients. “When a majority of stocks are in the red for the year, the next January’s return is also above average with lower market cap performing best.”
DeSanctis is one of a slew of analysts who’ve become bullish on smaller companies even if an economic downturn is looming. In his latest note to clients, he walked through some of his reasons for that view.
Small caps bring big profits in 2023″The macro backdrop continues to improve with high-yield spreads close to 5% and below their long-term average. The dollar has weakened considerably from its peak, while volatility has ticked lower,” DeSanctis wrote.
DeSanctis also expects an increase in mergers and buyouts that will be supportive for smaller companies. Despite rising concerns about a recession, he says M&A for companies valued at less than $1 billion is above average right now.
He points to China’s shift in COVID policies as another source of support for small caps, and recommends that investors ramp up their allocations to companies with exposure to Asia.
“These stocks are very cheap, revisions are holding up better, and last time China stimulated their economy in ’16, this cohort outperformed by over 6%,” DeSanctis said.
He suggests that investors look for high quality companies — generally defined as those with healthy balance sheets, above-average returns, and a history of steady earnings — that have “Buy” ratings from Jefferies analysts but have underperformed the broader market in 2022.
The 20 stocks below fit all of those criteria. While the Russell 2000 index, a small-cap benchmark, is down 21% this year, these 20 stocks have fallen at least 33%, and the worst performers have declined by more than 70% in 2022.
The stocks are ranked from lowest to highest based on the size of their losses expressed as a percentage. All calculations were current as of Thursday’s closing prices.