Markets

Now's the Time to Buy Small Caps -- Especially These 2 Stocks

It sure feels like a challenging investing environment -- especially for smaller stocks, since they are usually seen as the riskiest. But did you know the Russell 2000, a handy proxy for small-cap stocks, has risen a hefty 15% since late November? Then again, the index fell so sharply in August and September, the recent rebound only makes a dent.

Indeed, a broader look at small-cap performance leaves something to be desired: The Russell 2000 Index remains below levels seen five years ago.But there's a real reason for optimism for small caps, as that recent 15% upward move suggests. Small caps perform quite well at the depths of a recession and coming out of it.

In October 1990, for instance, the Russell 2000 stood at 120 as the United States entered into a recession. (That slump led Bill Clinton's campaign strategist James Carville to drum up the slogan "It's the Economy , Stupid.") Well, savvy investors looked beyond that recessionary phase and loaded up small-cap stocks, knowing they would pick up sharply after the slump.

And that's exactly what happened.

By early 1992, the Russell 2000 had rebounded more than 65% to around 200. (It reached new highs throughout the subsequent years as well.)

The recent 15% rebound in the Russell 2000 may be telling us a similar move is afoot.

I looked at the most appealing stocks in that index in the past, but am switching gears to the S&P SmallCap 600, another index that also houses some potentially robust rebounders.

In the table below, you'll find a group of small-cap stocks that are poised to boost sales at least 15% in 2012 and earnings per share ( EPS ) by a nice 40% -- or more, according to analysts' consensus forecasts. Best of all, these stocks have reasonable downside protection, trading at less than 16 times projected 2012 profits.

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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