The Case for Small-Cap Stocks: Analysts and Investors Weigh In
Many analysts and investors are bullish on small-cap stocks, citing favorable conditions for investment. Matt Orton, chief market strategist at Raymond James Investment Management, recently encouraged investors to strategically add small-cap stocks to their portfolios. He highlighted the improved backdrop for the small-cap sector, with the Russell 2000 index showing resilience and outperforming the S&P 500. Orton emphasized the compelling valuations, bottoming earnings, and positive trends in reshoring and continued capital expenditure as tailwinds for small-caps. He also expressed optimism that small-caps can continue to outperform if interest rates remain volatile and do not break out to the upside. Orton specifically favored the industrials and IT sectors, referring to them as "higher conviction" areas.
Tom Ognar, senior portfolio manager at Allspring Global Investments, shared a similar sentiment, finding small- and mid-cap stocks to be the most incrementally interesting among growth stocks. Ognar highlighted the valuation discounts currently available for small- and mid-cap stocks after a period of underperformance relative to large-cap stocks. He noted that this year has been favorable for growth stocks and believes the rally could extend to the broader market, leading to increased participation in small- and mid-cap stocks.
Bank of America also expressed optimism about the economic recovery and identified small-cap stocks as potential winners during this period. The bank conducted a screening process to identify the best small-cap stocks to play the recovery.
Top Small- and Mid-Cap Stock Picks
According to Ognar, some of the top small- and mid-cap stocks to consider include:
- Allegro Microsystems: Known as an "innovator designer" of sensor and power integrated circuits for the auto and industrial markets, Allegro Microsystems benefits from the growth drivers of electrification and the autonomous trend.
- Shoals Technologies Group: Ognar highlighted Shoals Technologies Group for its low-cost services in utility-scale solar energy projects. The company also shows potential for growth in solar storage and automotive electric vehicle charging.
RBC Capital Markets, in a September note, released an updated list of high conviction U.S. small-cap growth recommendations. Some notable additions include:
- Valvoline: This automotive services company stands out as one of the few names in the broadline category that can perform well regardless of macro conditions. RBC highlighted Valvoline's compelling valuation and gave it a price target of $43, indicating a potential 32% upside.
- Clearwater Analytics: RBC identified Clearwater Analytics as a fintech company with margin expansion potential and the ability to sustain 20%+ growth in the coming years. The stock has a price target of $22, suggesting a potential 13% upside.
- Xenon Pharmaceuticals: RBC considers Xenon Pharmaceuticals a high conviction play in the treatment of epilepsy and depression. The company's late-stage epilepsy trials have a high probability of success, and RBC believes it has the potential to generate significant revenue. The stock has a price target of $51, indicating a potential 38% upside.
In conclusion, analysts and investors remain optimistic about small-cap stocks, highlighting compelling valuations and positive trends. The recommended stock picks reflect opportunities in various sectors, including automotive services, fintech, and pharmaceuticals. As always, investors should conduct thorough research and consider their own investment goals and risk tolerance before making any decisions.
Hot Take: The Rise of Small-Cap Stocks and Its Impact on New Business Formation
In the realm of business journalism, the current bullish sentiment on small-cap stocks among analysts and investors is a significant development. This optimism, as expressed by Matt Orton of Raymond James Investment Management and Tom Ognar of Allspring Global Investments, could have profound implications for new business formation.
Small-Cap Stocks: A Favorable Investment Landscape
The improved backdrop for the small-cap sector, with the Russell 2000 index showing resilience and outperforming the S&P 500, presents an attractive opportunity for new businesses. Orton's emphasis on compelling valuations, bottoming earnings, and positive trends in reshoring and continued capital expenditure could serve as a guide for new businesses in strategizing their growth plans.
The Potential of Small-Caps in the Current Economic Climate
Bank of America's optimism about the economic recovery and the identification of small-cap stocks as potential winners during this period could signal a shift in investment trends. This could lead to increased capital inflow into small-cap stocks, providing new businesses with the necessary funding for expansion and growth.
Top Small- and Mid-Cap Stock Picks: A Guide for New Businesses
The top small- and mid-cap stocks highlighted by Ognar and RBC Capital Markets, including Allegro Microsystems, Shoals Technologies Group, Valvoline, Clearwater Analytics, and Xenon Pharmaceuticals, provide valuable insights into sectors that are currently thriving. These insights could guide new businesses in identifying potential growth areas and developing their business strategies accordingly.
In essence, the current bullish sentiment on small-cap stocks among analysts and investors could have far-reaching implications for new business formation. The favorable investment landscape, coupled with the potential of small-caps in the current economic climate, provide new businesses with significant growth opportunities. As such, new businesses could leverage these insights in strategizing their growth plans and positioning themselves for success in the ever-evolving business landscape.
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