Large-cap stocks are generally considered safe bets during periods of volatility, but many Wall Street professionals believe that small-cap companies are looking increasingly attractive as the risk of a recession increases. Small-cap stocks have often gotten less love than larger stocks, given the volatility of first-time earnings, greater insider bias, and lower visibility. They are also often avoided during market fluctuations in favor of more stable options. But history shows that investors can be wrong. “Historically, recessions have been good buying opportunities for small caps,” July 22. Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, said in a statement. “We also feel that small caps are already experiencing significant economic pain. The brokerage sees small-cap stocks as “very close” to bearish prices, which can be seen “quite clearly” in valuations. She noted that small-cap stocks now look historically cheap relative to large-cap stocks, with the small-cap Russell 2000 trading in a price-to-earnings range that “tends to mark its bottom.” According to Christian Galipeau, chief market strategist at Putnam Investments, small-caps not only outperform during recessions, but also for long periods of time when the economy emerges from recession. He found that small-cap stocks underperformed large-cap stocks in the months leading up to and during the recession, as well as “for the next three years” as the economy exits the recession. Citigroup noted that small-caps were the first to weaken as inflationary pressures took hold and, in turn, may now be “the first to recover.” It says valuations of small-cap stocks show they are “significantly de-risked” and pricing in downside fears. “Small and large caps trade near post-financial crisis lows, and relative valuations not far from 20-year lows,” July 26. Citigroup strategists led by Scott Chronert wrote in a note. Top Bank of America Stock Ideas Bank of America says “a lot has changed” since the start of the year, citing some developments: Fed policy, geopolitics, market volatility, rampant inflation and fears of a recession. “However, volatility and regime change provide opportunities, and we continue to see a favorable backdrop for stock picking,” Bank of America strategist Jill Hall wrote in a recent report. She noted that stocks with reasonable margins and pricing power have been rewarded amid rising interest rates and inflation. The bank likes food delivery provider DoorDash, which it says is not directly exposed to commodity and food inflation, given its position as a third-party platform. The bank is targeting $90 for shares that closed at $72 on Monday, representing a 20 percent gain. Bank of America also likes Illinois-based Option Care Health as the home care name least exposed to labor cost pressures. Hall said the company could see even more growth as it builds in better free cash flow. The bank has a $38 price target on the stock, implying an 11.8 percent upside to the stock’s closing price on Monday. Read more Has the market bottomed out? Here’s what Wall Street has to say after July US stocks recovered. Is the US in recession? This strategist tracks 14 indicators. A top tech analyst says this FAANG stock is at a “tipping point,” giving it a 33% upside, with Florida-based electronics maker Jabil also making the list. The company is leveraging its presence in end markets that are experiencing secular growth, as well as in sectors such as healthcare that the bank considers “generally recession-proof.” Its shares traded around $59 on Monday, implying a 40% upside to the bank’s $82 stock price target. Bank of America also likes chipmaker ON Semiconductor because of its high turnover potential, premium product and high growth trends in electric vehicles. The bank assigned a target price of $80, which means that on August 1 the stock’s closing price, which was around $64, could rise 25%. Barclays also named a number of small-cap overweight stocks that it sees as “high conviction”. provides the highest risk-adjusted returns. The bank’s picks include cybersecurity firm CyberArk, biopharma Sarepta Therapeutics and homebuilder Skyline Champion.
Small-cap shares that will outperform throughout a recession