Jefferies Reiterates a Bullish Outlook for Small and Mid-Cap Equities

November 20, 2020 9:02 AM EST

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A team of analysts at Jefferies has reiterated a bullish outlook on small and mid-cap stocks. They believe there is enough room to grow and catch up following nearly 2 years of underperformance.

As these stocks have broadly been out of favor with investors since 2017, Jefferies says that “the recent bout of strong performance is only a small bounce back toward the longer-term trend.”

“While we continue to emphasize the opportunities within US equities, we particularly emphasize the sub-$30B space. Year-to-date, large caps have seen record flows, and performance, while up until recently small caps have been ignored. When comparing the SPX total market cap vs. the RTY, we found that the ratio sits near 20Y highs, and the RTY would need to grow by $700B in cap just to right-size the ratio vs. the L-T trend,” it is said in a note sent today.

One of the key drivers behind a call that small and mid-cap stocks will outperform is a belief that improving economic backdrop is likely to help smaller equities more than their large cap peers.

“We believe the gearing to an economic recover is on full display, and as Smid-cap Strategist Steven DeSanctis points out, small caps have beaten large coming out of each of the last 10 US recessions.”

Healthy balance sheets will likely yield higher M&A activity which should support the thesis that small and midcap companies outperform large cap peers when M&A activity accelerates, analysts wrote.

Jefferies highlights the list of following stocks in this category: AAN, AHCO, ALLK, BLMN, BURL, CAR, CCK, CSL, ELF, FLT, FND, KMT, LFUS, LKQ, LOCO, MEOH, ON, PAR, PLNT, PRAH, SAGE, SIX, SPR, STT, SYF, TVTY, TWNK, WAL and WETF.

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