Top small caps from UBS if market rally keeps broadening out

Small-cap stocks have had a shaky start in 2024, but UBS thinks the sector is worth looking at as a potential broader market rally could boost the sector. Year to date, the Russell 2000 index of small companies is up 2% while the S & P 500 has gained 6.6%. But over just the past month, roles are reversed, with the Russell 2000 climbing 6.7%, far outstripping the 2.7% rise in the S & P 500. All but two sectors, utilities and real estate, are positive in 2024. Combined with the Federal Reserve’s anticipated lowering of borrowing costs this year, small-cap names could keep their recent hot hand. “We view the expectations around interest rates coming down as incrementally a more supportive backdrop for SMID stocks,” UBS analyst Joseph Parkhill wrote in a note last week, referring to small- to mid-cap stocks. With these factors in mind, UBS analysts compiled their list of high conviction, small- and mid-cap names that the bank believes have a unique investment thesis behind them. The following stocks all have a buy rating from UBS: Roger Federer-backed shoemaker On Holding could become an industry leader in growth and earnings, according to analyst Jay Sole. He forecasts earnings per share reaching a 30% compound annual growth rate between now and 2028. “The market sees On as mainly a running shoe brand and doesn’t fully appreciate the brand’s potential to address a much larger market, in our view,” said Sole. U.S.-traded shares of Zurich-based On have surged more than 22% in 2023, bringing the past 12 months’ rally to 45%. According to the consensus price targets of analysts surveyed by LSEG, formerly Refinitiv, the stock has about 9% more upside. ONON 1Y mountain On Holding over the last year Phoenix-based regional bank Western Alliance Bancorporation is another small cap that UBS is optimistic about. Shares are down nearly 10% year to date, but are 5.6% higher so far this week. According to analyst Brody Preston, the bank showed it could survive the regional bank crisis in 2023 and remain profitable, giving him confidence it can do so again in 2024. Consensus price targets on the stock imply a 28% rally ahead, according to data from LSEG. Investors should expect volatility in the name “if cuts are pulled out of the forward curve,” Preston said, referring to delayed interest rate reductions. “However, similar to our view in 2023, we would remain buyers on rate-driven sell offs.” On Tuesday alone, WAL was ahead 7.4% in a down market. Food service provider Aramark has a promising “near-term margin opportunity,” said analyst Joshua Chan. He cited an improving price-cost dynamic and supply chain conditions. There’s also the potential for the company’s growth and margin guidance to widen later in the year, he added. UBS has a $35 price target on Aramark shares, implying the stock could add about 13% on top of Monday’s close. Analysts across Wall Street are also broadly favorable, with 13 of 17 analysts rating it a buy or strong buy, according to LSEG. Shares are up about 12% in 2024 and more than 15% over the past 12 months. — CNBC’s Michael Bloom contributed to this report.