Citi calls these smaller stocks buys that are expected to rally
It’s time to go all in when it comes to the small-cap rotation, according to Citi. After years of stock market domination by megacap technology titans, small-cap stocks are finally having their moment in the sun. The Russell 2000 has risen nearly 11% year to date, although this gain still pales in comparison to the S & P 500 ‘s 22% rally during the same period. Investors have increasingly been shifting their focus toward smaller companies, especially as the Federal Reserve has hinted at more interest rate reductions on the horizon. Since small-cap stocks generally have more floating-rate debt than their larger counterparts, they also tend to benefit from lower interest rate environments. In a recent note, Citi U.S. equity strategist Scott Chronert highlighted two specific catalysts for small-cap stocks: attractive valuations and a narrowing expected earnings growth gap versus larger companies. “Combined, investors could be paying a much lower multiple for a similar growth profile going forward,” he wrote. “Given post-pandemic peculiarities, the lack of a real cycle, and secular trends that support leaders, we still want to be owners of some Large Cap winners, but increasingly view Small/Mid Cap as an attractive alternative to the other 493. Said differently, we are more comfortable dipping down cap in search of fundamental winners and thematic expressions.” In the note, Citi also shared a list of its buy-rated small- and midcap leaders that have expected total returns — that is, the capital appreciation of the shares and the value of their reinvested dividends — of at least 10%. Here are a few of the highlighted names: One name on Citi’s list of preferred names was Abercrombie & Fitch . Shares of the clothing retailer have soared 56% this year. Citi forecasts an expected total return of 33% for the name. Earlier this month, JPMorgan raised its price target on the name to $195, which corresponds to a potential upside of 41% from Monday’s close. As catalysts, JPMorgan analyst Matthew Boss pointed to accelerating brand momentum at Abercrombie and Hollister, alongside increasingly favorable promotional activity. Citi also highlighted Ally Financial as a stock to buy, and the firm sees an expected total return of 48% for the name. Shares of the bank holding company are up less than 1% on the year. JPMorgan upgraded shares of Ally to overweight from neutral earlier in October. “Our Overweight rating on ALLY reflects that despite the recent disappointing outlook on credit and margins, the stock price already discounts most of the realistic credit and earnings scenarios for the next 18 to 24 months. We believe this creates a favorable asymmetric risk/reward profile over our investment horizon,” wrote analyst Richard Shane. Shane’s $40 price target is nearly 14% higher than where shares of Ally closed on Monday. Entertainment stock TKO Group , up nearly 43% this year, is another name to watch out for. Citi expects a total return of 19% for the name. In September, Pivotal Research Group initiated coverage of the stock at a buy rating. “TKO represents a unique asset with clear strong revenue growth opportunities primarily on likely materially higher media rights fees driven by the aggressive entrance of large cap tech players into bidding on sports rights, higher event revenue, currently under-monetized advertising/sponsorship and new potential revenue streams,” said analyst Jeffrey Wlodarczak. Wlodarczak’s $170 price target implies a potential upside of 46% for the stock.
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