- Smaller stocks have mostly priced in the risk of a recession, according to Bank of America.
- Strategist Jill Carey Hall says investors’ preferences haven’t changed in the recent downturn.
- Carey Hall says these 20 buy-rated stocks could lead during a market comeback.
In a tough and deeply tumultuous market, it might be surprising to hear that anything is working consistently, but Jill Carey Hall at Bank of America says that’s the truth.
Jill Carey Hall is the bank’s head of US small- and mid-cap strategy, and she says that following the money has been the path to success for more than a year.
“In a market rife with
and leadership shifts, the route to alpha within small caps has remained rather consistent: own Quality & Value,” she wrote. Together with momentum factors, those have been the most effective ways to invest over the last three months, in 2022, and over the last 12 months.
Those smaller companies have mostly priced in a
by now, she says, because the small-cap Russell 2000 index has dropped 29% since early November. That’s about 80% of its typical loss around recessions. That means a lot of risk is priced in.
Another effective tactic is companies that are returning cash to shareholders.
“All Cash Deployment factors we track within small caps (Dividend Payers,
, Dividend Growth and Share Repurchase) have been leading the index since the start of 2021,” she said. “Simply buying Russell 2000 dividend payers (+20%) and selling non-payers (-23%) would have generated a 40ppt+ spread over that period.”
That’s likely to become a bigger issue as interest rates rise, she adds. But with relatively little downside remaining, the most rewarding path forward might be buying stocks that have been oversold.
“We screen for beaten-down opportunities within the index that could be well-positioned if stocks rebound,” she said. These companies have suffered steep declines since November 8, when the Russell index itself peaked. Bank of America thinks they are likely to outperform based on the “Buy” ratings and a positive view of the sectors they reside in.
These are the 20 small- and mid-size stocks that best meet Bank of America’s criteria, according to Carey Hall. The stocks’ performance since November 8 was calculated based on Friday’s closing prices.