Are you looking to invest in small-cap stocks that could potentially provide a hedge against stock market volatility? According to Bank of America, high-quality small-cap stocks could be the way to go in the current market environment. With a looming September rate cut by the Federal Reserve, investors have been rotating into small-cap stocks, which tend to depend on financing and are domestically oriented.
The Russell 2000 index, which tracks small-cap stocks, has outperformed other major averages this quarter, showing a gain of more than 5% since the end of June. In comparison, the S&P 500 and Dow Jones Industrial Average have seen gains of 2.1% and 4%, respectively, during the same period. However, recent market volatility and growth concerns have led to sell-offs in both small- and large-cap stocks. The Russell 2000 is down 4.3% in August, while the S&P 500 is up by only 1%.
Bank of America has screened for small-cap stocks that are not only high in quality but also inexpensively priced, in order to potentially appreciate and weather any future market volatility. These high-quality stocks have to meet specific criteria, such as return on equity, accruals ratio, and financial leverage ratio, as used in the S&P 500 Quality Index. Additionally, they must have positive earnings revisions and low refinancing risk to protect against wider credit spreads or unexpected rate cuts by the Federal Reserve.
Among the names identified by Bank of America’s screen are American Eagle Outfitters, a clothing retailer with potential upside of nearly 19%, according to analysts. Another high-quality small cap is homebuilder KB Home, which has seen shares rise by more than 31% this year. Financial services company StoneCo, down 23% this year, is also highlighted as a potential investment opportunity. Analysts see a potential upside of nearly 29% for the stock.
In addition to these names, Bank of America’s basket of small-cap stocks also includes Vita Coco, a coconut water company, and Knife River, a construction materials maker. These stocks have the potential to provide investors with opportunities for growth and value in the current market environment.
At Extreme Investor Network, we are committed to providing our readers with valuable insights and opportunities in the world of investing. Stay tuned for more updates and recommendations on how to navigate the ever-changing market landscape.