By Barbara Kollmeyer
How long can the Federal Reserve hold off before tapping the brakes on its ultra accommodative monetary policy? The biggest rise in consumer prices since 2008 has provided plenty of food for thought on that front.
Investors are on the sidelines for Wednesday, following that data shocker and with all eyes on the start of Chairman Jerome Powell’s two-day appearance on Capitol Hill . That well-timed event may see lawmakers press him on whether the central bank is letting things run too darned hot.
The stock pullback on Tuesday was hardest on the smaller companies, with the Russell 2000 index /zigman2/quotes/210598147/delayed RUT -0.23% dropping 1.9%, versus 0.3% to 0.4% falls for the bigger indexes. The Russell is off to a weak start for the quarter, which lines up with a Bank of America fund managers survey showing some steam coming out of vaccine and postelection bets. Value over growth and small-cap over large are no longer en vogue it seems.
But now is not the time to throw all the babies out with the bathwater, says our call of the day , from Jefferies strategists Steven DeSanctis and Eric Lockenvitz who have 18 small-to-midcap stock ideas to share.
“Small has taken it on the chin vs. large since 3/15, but we are believers in the outperformance cycle. Earnings are better, valuations cheaper, just need macro to turn back up. Watch for big burst of outperformance,” they said in a note to clients on Wednesday.
The team believes markets are “in the midst of a multiyear outperformance cycle for small-caps, however in the ‘pause that refreshes’ period.” And as for cyclicals and value themes, “too many investors were on this side of the boat and when the waters got a bit more choppy, we have seen a rotation back toward growth, secular growth, and even the bond proxies.”
They offer three main reasons for that optimism, starting with cheaper relative valuations for smaller stocks reflected in their models and the fact “no cycle ever ended with small cheaper than large.” The second is that earnings growth estimates for smaller companies continue to rise and at a faster pace than bigger rivals. Finally, the strategists note the second-best start in history for mergers and acquisitions in the asset class. More deals means better performance, and they don’t see a let-up soon, with healthcare one sector they are watching closely.
As for their stock picks, given not all small-to-midcap asset class have performed well year to date, “we looked for buy-rated names that we determined were higher quality, better balance sheet, and cheap,” said DeSanctis and Lockenvitz.
That list includes Five Below /zigman2/quotes/202743941/composite FIVE +0.21% , LCI Industries /zigman2/quotes/208281861/composite LCII -0.07% , TopBuild /zigman2/quotes/201668256/composite BLD +0.57% , Ollie’s Bargain Outlet /zigman2/quotes/208674659/composite OLLI +0.09% , Standard Motor /zigman2/quotes/205819127/composite SMP +0.21% , Casey’s General /zigman2/quotes/208156554/composite CASY +0.15% , Nu Skin Enterprises /zigman2/quotes/200206291/composite NUS -1.34% , Vital Farms /zigman2/quotes/219769666/composite VITL +0.06% , Virtu Financial /zigman2/quotes/204693277/composite VIRT +1.19% , Integra Life Sciences /zigman2/quotes/200866868/composite IART +2.45% , Catalent /zigman2/quotes/206700489/composite CTLT -0.57% , Pacira Biosciences /zigman2/quotes/202929053/composite PCRX +0.12% , Amedisys /zigman2/quotes/207929745/composite AMED +0.14% , SiteOne Landscape /zigman2/quotes/204613089/composite SITE +0.65% , Timken /zigman2/quotes/200714911/composite TKR +0.84% , Builders FirstSource /zigman2/quotes/208924960/composite BLDR +0.26% , Ciena /zigman2/quotes/208745450/composite CIEN -0.52% and Huntsman /zigman2/quotes/202684633/composite HUN +0.05% .
More bank earnings, more inflation data
Uh oh, more inflation pressures. June producer prices came in at a 1% gain, which was above the 0.5% expected. Still to come is the Federal Reserve’s Beige Book review of economic conditions.
More big financial names reported earnings, with BlackRock /zigman2/quotes/207946232/composite BLK -0.63% topping estimates , Bank of America /zigman2/quotes/200894270/composite BAC -0.13% and Citigroup delivered mixed results, while Wells Fargo /zigman2/quotes/203790192/composite WFC +0.57% reported a lift to earnings . Delta /zigman2/quotes/200327741/composite DAL -0.53% shares rallied after the airline posted a revenue beat and reported a narrower-than-expected loss.
Apple /zigman2/quotes/202934861/composite AAPL +0.20% is reportedly boosting iPhone production by up to 20% this year , on anticipation of heavy demand for its next upgrades. J.P. Morgan analysts added Apple to their focus list, lifting the price target to $175. Those shares were up in premarket trade.
The delta variant, vaccine resistance and Fourth of July gatherings have caused U.S. COVID-19 cases to double in the past three weeks , with infections at about 23,600 a day. And despite the country’s restrictions easing next week, masks will still be required on public transport, said London Mayor Sadiq Khan . Holland saw a 500% surge in infections after fully reopening.
European officials are set to announce aggressive laws on Wednesday to wean those nations off fossil fuels at a pace faster than anywhere else in the world.