There is a “January Effect” rally in small cap stocks. how to play it
Small-cap stocks are up sharply in the first few weeks of January, confirming an outperformance often seen at the start of a new year. It’s a trend investors may want to buy before it potentially fades. This year, the Russell 2000 Index — which tracks small-cap stocks — is up 7.4% through Monday, outperforming its large-cap counterpart, the Russell 1000, which is up 5%. Small caps have also outperformed the S&P 500, which is up about 4.5%. The so-called January Effect rally, where small caps outperform large caps, is a common occurrence. The moves may even begin in mid-December as tax loss selling eases and new money enters the market. Small caps generally hold their lead over larger companies through May, although the trend begins to slow in March, according to Stock Trader’s Almanac. Even within small-cap names, the smallest companies have performed best by market share, according to a Jan. 24 release from Jefferies. “As the calendar moves into the new year, we’ve seen a nice recovery rally in the smallest small cap names under $500 million [in market capitalization] up 11.3%,” wrote Steven DeSanctis, Jefferies’ small-cap strategist. “These stocks are the cheapest part of the market but have been ignored until now.” Small caps, while growing fast, are notorious for their volatility. He called for careful judgment and stressed the importance of quality. “In recent marketing meetings we’ve talked about how neither of us are cutting edge, but we still wanted to emphasize quality,” DeSanctis said. “The headwind has been that this is difficult to achieve.” In Trend, Jefferies searched for a list of potential buys among small-cap stocks, limiting the search to only buy-rated companies with market caps under $3.5 billion that offered the highest quality and strong balance sheet momentum as measured by the month-to-date Change in 200-day moving averages.Restaurants Bloomin’ Brands, which owns chains like Outback Steakhouse and Bonefish Grill, and Dave & Buster’s top Jefferies’ list of small-cap names with higher quality themes. Both are up double digits in 2023 and are highly valued on Wall Street. According to FactSet data, analysts expect Bloomin’ Brands to grow about 18% this year and Dave & Buster 27%. Arch Resources, the only energy stock on the list, also benefited from the sector’s outperformance in 2022, gaining more than 57%. However, there could be more upside for Arch, as analysts’ average price target for the coming year calls for a 22% increase. Other stocks are betting on emerging trends investors should watch out for in the years to come, such as Addus HomeCare, which provides personal care, home health care, and hospice services to an aging population. Analysts expect it to gain more than 12% over the next year. The screen was also made by the manufacturer Methode Electronics. Wall Street expects to gain more than 17% in the coming year.
https://www.cnbc.com/2023/01/24/theres-a-january-effect-rally-in-small-cap-stocks-how-to-play-it.html There is a “January Effect” rally in small cap stocks. how to play it
