These small-cap stocks could make you the most money in 2023, based on two important data points

Great divide

After a stock market rally from mid-October to November, stocks have since fallen. Recession fears are growing and the Federal Open Market Committee is bracing for another interest rate hike on Dec. 14.

BNP Paribas strategists led by Greg Boutle, head of US equity and derivatives strategy, reviewed 100 years of stock market crash data and concluded that investor sentiment will bottom out in 2023. and the expectation of a recession imply “a trough in the middle of the next”. year,” Boutle said.

This signals a rebound for the stock market as a whole, which could mean an even bigger rise for small-cap stocks.

Here’s why: The forward price-to-earnings ratio of the S&P Small Cap 600 Index is near its lowest point, relative to the S&P 500 SPX Large Cap Index,
since the end of 1999:

On average, small caps traded slightly below the S&P 500, as shown at the top right of the chart. They are now close to a low and only slightly higher than a year ago.

Again, the S&P Small Cap 600 index’s forward-weighted price-to-earnings ratio is now 12.7, down from 15.5 a year ago, according to FactSet. (The S&P 500 forward PER fell to 17.2 from 21.4 a year ago.)

Given that the stock market can be expected to rebound amid a recession in anticipation of lower interest rates and a return to economic growth, investors may well be on edge. expect an accelerated rebound for small caps.

The best way to ride small caps, if you expect the market to rally, might be to buy shares of an exchange-traded fund, like the SPDR S&P 600 Small Cap ETF SLY,
iShares Core S&P Small Cap ETF IJR
or the Vanguard S&P Small-Cap 600 ETF VIOO.

Analysts’ Favorite Profitable Small Companies

Some fund managers compare their small cap ETFs or mutual funds to the Russel 2000 RUT Index,
but this index is not selective. In fact, 40% of Russell 2000 companies were unprofitable in their last reported fiscal quarters. Only 22% of the S&P 600 was unprofitable, according to FactSet.

Standard & Poor’s criteria for initial inclusion in the S&P Small Cap 600 Index include positive earnings for the most recent quarter and for the sum of the last four quarters.

Taking the idea of ​​profitability one step further, we looked at the S&P 600 as follows:

• Covered by at least five analysts surveyed by FactSet — 271 companies.

• Positive consensus earnings per share estimates for calendar year 2023 – 236 companies.

• Rated “buy” or equivalent by at least 75% of analysts — 56 companies.

Of the remaining 56 companies, here are the 20 with the most upside potential, based on consensus price targets:

Click on the symbols for more information about a company or index in this article.

You should also read Tomi Kilgore’s in-depth guide to the Wealth of Free Information on the MarketWatch quotes page.

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