- Jefferies strategist Steven DeSanctis expects good returns for small businesses going forward.
- He says low-valued stocks have performed surprisingly well of late.
- He recommends a group of 16 stocks that are both undervalued and showing signs of upside momentum.
Stocks held onto their October gains into November, and with December traditionally the time for stocks to enjoy a “Santa’s rally”, the market looks set to take advantage of a tough end to the year.
Strategist Jefferies SMID Cap Steven DeSanctis says he thinks this backdrop looks good for small businesses, as the dollar has lost some of its recent strength and high-yield bond spreads are narrowing, which is good for small businesses. companies that are more indebted.
In the meantime, he says active managers will need to increase their exposure to small-cap stocks.
“If the smalls continue to outperform, we’re looking for flows to pick up; the assets need to lower their cap,” he wrote in a recent note to clients. While particularly positive on cyclical stocks, DeSanctis said some other areas showed surprising strength.
“Inexpensive stocks with good momentum continue to perform well,” he said. “High yield spreads have narrowed, helping companies with weaker balance sheets and therefore cheaper valuations, coupled with the fact that it is momentum season, we have used these two factors to build our theme ideas .”
DeSanctis has been particularly bullish on cyclical stocks, believing they will outperform when the economy bottoms out and then starts to strengthen. But he says that at the moment, stocks with low prices relative to earnings and those with some positive momentum have been attracting investor interest.
He says very cheap stocks are doing exceptionally well relative to their peers, and the same is true for high-momentum stocks relative to low-momentum stocks. While this may not last forever, he says the trend is continuing and the combination of the two factors should be a sensible investment approach.
“Instead of arguing against these factors, we decided to build on them by looking for well-ranked names in both blocks,” he wrote.
The following 16 stocks all have “Buy” ratings from Jefferies analysts. They are all in the top quintile of small and medium-sized companies in terms of valuation, which means that valuation metrics show them as inexpensive compared to their peers. They are also in the top 40% in terms of momentum, meaning their recent performance has been stronger than the rest of the pack.