Smaller market capitalization stocks are finally joining the stock market rally. The trick now is finding the ones that haven’t rallied too much.
The
S&P 600,
an index of small caps, is up just under 4% for the year. It was down for the year through much of the spring, as most of the rallying happened in Big Tech stocks, which have seen earnings expectations benefit from the advent of artificial intelligence.
Now, other stocks are joining the rally, including smaller names, with the S&P 600 up about 8% from its low point in early May. Smaller companies tend to see larger swings in profits as the economy rises and falls. And recently, markets see the economy stabilizing soon enough as the Federal Reserve pauses on interest-rate hikes, a move meant to cool economic demand.
Do small caps still have room to run?
We ran a screen of the S&P 600, looking for companies with upwardly revised analyst 2023 earnings-per-share estimates this year, versus down 18% in aggregate for the
S&P 500 index.
The stocks on our screen have to have either performed in line with or worse than the index this year. And they have to be in “cyclical” sectors, which see the fastest uptick in profits when the economy rebounds.
One name was the $2.05 billion by market cap
First Financial Bancorp
(ticker: FFBC). The stock is down almost 12% this year, as depositors across many small banks had withdrawn money from savings accounts, chasing higher-yielding money market funds. That has pressured loan-volume expectations, exposing the banks with weak balance sheets, as the value of their bond holdings had dropped as rates rose. But this bank, which sees most of its revenue from lending, has seen its 2023 earnings-per-share estimates rise about 3% this year ,
In the consumer sector, there is
Leslie’s
(LESL), a $1.7 billion retailer of swimming-pool supplies. The stock is down more than 20% this year, while earnings-per-share estimates are up about 1%.
Barnes Group
(B), $2.07 billion maker of industrial components, has seen its stock remain about flat so far this year. Its earnings-per-share expectations are up just over 2%.
Evercore strategists ran a similar screen. They screened the
Russell 2000 index
of small caps for names with market caps greater than $1 billion and 2023 earnings per share that should grow year over year. Their earnings revisions for the year had to be at the higher end of the rest of their sectors and their price/earnings multiples, or valuations, had to be below their five-year averages. They not only had to be cheap relative to their earnings potential, but there also had to have short interest at the higher end of their ranges in the past year. That means “short sellers,” who have bet against a stock, will have to buy shares back on any sign of strength.
Among the stocks on Evercore’s list are four financial companies, including
Merchants Bancorp
(MBIN).
Evercore also turned up
Xerox Holdings
stock (XRX). Analysts expect earnings per share at the imaging company to rise about 34% year over year, and shares trade at about 9 times earnings, compared with the five-year average of about 9.5 times.
Write to Jacob Sonenshine at [email protected]
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