Oppenheimer shares 12 small-company stocks to buy while this unloved part of the market is beaten down and before it makes a comeback

trader excited animated crazyReuters / Brendan McDermid

Summary List Placement

Up until this week, it seemed like the stock market would continue enjoying a strong run this year with the S&P 500 having hit all-time highs four times since the beginning of 2021. 

Most recently, the S&P 500 closed above 4,185 for the first time on April 16. April 1 also marked a closing milestone for the index as it surpassed 4,000 points.

The same can't be said of the Russell 2000.

Even though small-caps are outperforming their larger counterparts on a year-to-date basis, they've failed to continue generating lofty gains these past couple of months as the Russell 2000's three-month return of 5.2% now lag the S&P 500's performance of nearly 11%

However, the small-cap index still houses some appealing opportunities for investors given that the Russell 2000 is just taking a breather and can resume its powerful run, according to Ari Wald, the head of technical analysis at Oppenheimer & Co. That's because technical analysis shows small caps failed to reach fresh highs in April as a result of a bull-market rotation rather than money becoming less concentrated at a major peak.

And some strategists agree that small-caps are just going through a pause.

"After the 10-best 12-month periods, small caps tend to take a pause over the subsequent 6 months by an average of 7.3%, but rebound over the next 6 months to finish lower by 5.6%," Steven DeSanctis, an equity strategist at Jefferies wrote in a note on Monday. He added that we have now entered the "pause that refreshes" period for small-caps. 

But more specifically in the small-cap space, to Wald, conditions are becoming increasingly beneficial for small-company growth stocks and could therefore be next in the rotation line, he said in a recent note to clients.

For the most part since 2017, growth areas have had a "near-zero" correlation to the 10-year and can offer above-average returns as long as the yield sits below 3%. This is important to consider given the fact that the consensus believes rates can continue rising, he said. 

"Overall, we believe portfolio diversity should be rewarded because rates having been a key driver of market rotation and showing signs of consolidating. We like beta's pure exposure to the market's recovery, and reiterate growth in case the upward trajectory in rates doesn't move in a straight line — which we're seeing develop," he added. 

oppenheimer note

And although the iShares Russell 2000 Growth ETF has dropped around 10% from its February peak, it has corrected into its 200-day moving average relative to the S&P 500. That opens up a near-term opportunity to buy long-term strength as investors use this indicator to help determine long-term falling or rising trends. Therefore, when a security is trading above its 200-day moving average one might deduce that it's a rising trend, according to Wald. 

Additionally, its daily RSI – a momentum indicator – is at a "higher low" which signals that selling aggressiveness is diminishing and that recent underperformance is showing early signs of becoming "less bad," he added. In an uptrend bull market, RSI usually remains in the 40 to 90 range while RSI tends to stay within the 10 to 60 range in a downtrend or bear market. 

Oppenheimer note

That being said, there are 12 stocks within the iShares Russell 2000 Growth ETF that have corrected towards the bullish slope of their 200-day average and look promising to Wald.

They used the intersection between the 50-day and 200-day moving averages as a proxy for trend, with a positive percentage representing how far above the 50-day is from the 200-day and a negative percentage indicating how far the 50-day is below the 200-day.

The 12 names are listed below, in no particular order. We have included their corresponding tickers, market caps, and year-to-date performance.

1. Quaker Chemical CorporationMarkets Insider

Ticker: KWR

Market cap: $4 billion

Year-to-date performance: -4.6%

Source: Oppenheimer



2. Overstock.comMarkets Insider

Ticker: OSTK

Market cap: $4 billion 

Year-to-date performance: 29.9%

Source: Oppenheimer



3. NeoGenomicsMarkets Insider

Ticker: NEO

Market cap: $6 billion

Year-to-date performance: -11.4%

Source: Oppenheimer



4. AppianMarkets Insider

Ticker: APPN

Market cap: $10 billion

Year-to-date performance: -22.1%

Source: Oppenheimer



5. Varonis SystemsMarkets Insider

Ticker: VRNS

Market cap: $6 billion

Year-to-date performance: -1.7%

Source: Oppenheimer



See the rest of the story at Business Insider

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