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Schaeffer's Senior V.P. of Research on Small-Caps

The Russell 2000 Index (RUT) has been on a tear in the last 12 months. To the uninitiated, choosing small-caps may seem like a daunting task akin to throwing darts at a dart board. Against this backdrop, Benzinga sat down with Senior V.P. of Research Todd Salamone at Schaeffer’s Investment Research to talk about some of the implications of the RUT's rise and the importance of education in order to make informed investment decisions.

Below is an excerpt of the article, which can also be found here.

Small-cap stocks have been soaring over the past few months, with the small-cap Russell 2000 Index (RUT) outperforming large-cap indexes such as the S&P 500 and Nasdaq 100 that are relatively flat on the year.

The Russell 2000, which tracks 2,000 small-cap companies, is up 18.5% year-to-date as of March 18, 2021. In comparison, the Nasdaq 100, which is made up of the 100 largest non-financial companies in the technology-heavy index, is up 1.2% YTD. Although still early in 2021, this marks a distinct change from previous years in which value-oriented small caps have struggled to garner quite the same investor attention as more high-profile, performance stocks.

In further examining the rise in small-cap stocks, Senior Vice President of Schaeffer’s Investment Research Todd Salamone spoke with Benzinga regarding his thoughts on the rise of small caps, as well as, what small-cap companies investors should keep an eye on and how investors can position themselves for an economic rebound.

Salamone also attended the recent Benzinga Global Small Cap Conference, which took place from March 24-25, to share the following analysis as well as additional insight with attendees. The two-day conference featured presentations from executive leadership of small-cap stocks, specifically in the biotech industry. 

Will The Small-Cap Rally Continue?

Small-cap stocks have had a remarkable run during the pandemic. As a result of this growth, many traders have been left to question whether or not this trend will continue in the months ahead. 

According to Salamone, the technical picture of Russell 2000 and ETFs like the iShares Russell 2000 ETF (IWM) 1.05% does suggest that the rising trend will likely continue.

At the end of 2020, the iShares Russell 2000 ETF (IWM) experienced a breakout above the $175 area, which is double the $86-$87 resistance level that was in place from 2007-2012, Salamone noted. 

“In fact, the $175 area marked a huge IWM peak in late 2018 and this level didn’t get taken out until late last year. In other words, there was a lot of profit-taking as buyers that bought the 2013 breakout re-assessed risk from 2018 into late 2020,” said Salamone.
  
He also noted that long-term breakouts such as this one are usually long-lasting, “especially when there are still many pessimists, which was the case in late 2020 as was evident by the huge short interest on IWM components.”

Companies To Watch

Schaeffer’s Investment Research favors companies that display strong price action while sentiment measures indicate some lingering doubt. Salamone noted that this skepticism represents future buying power as the market is proving naysayers wrong who might be forced to eventually capitulate.

Given this preference, here are a few names on Schaeffer’s radar in the small-cap space:

Shake Shack, Inc. (NYSE:SHAK) is an American burger chain with about 275 locations worldwide and a $5 billion market cap. Given the number of locations and current market cap, this leaves room for tremendous growth potential for the company as the world continues to slowly step out from under the shadow of the pandemic. In 2021, the stock has hit new all-time highs, with current YTD performance up 40% as of March 18, 2021. The company also has the potential to garner future positive sell-side attention, as only four of the 23 analysts following SHAK rate it a buy. 

United States Steel Corporation (NYSE:X) and Alcoa Corp (NYSE:AA)
U.S. steel is an American integrated steel producer and Alcoa is an American industrial company as well as the world's eighth-largest producer of aluminum. Both companies have market caps of around $6 billion and low analyst ratings, which provides them with a lot of upgrade potential. 

Aspira Women’s Health (NYSE:AWH)
Develops gynecologic tests for identifying ovarian cancer and other gynecologic diseases. The company has a market cap of less than $1 billion. They expanded network access in October. AWH had a multi-year breakout in late January above the 2011 intraday peak but shares were still well off from their all-time high in 2003.

Sonos Inc (NASDAQ:SONO)

A developer and manufacturer of wireless, multi-room audio systems. The company has a $5 billion market cap. In November, the company announced a buyback plan and shares gapped higher in mid-February on earnings. Shares are currently surging both YTD and year-over-year, up 72% and 479% respectively.  

Economic Rebound

Speaking on small caps holistically, Salamone singled out the iShares Russell 2000 ETF (IWM) as offering diverse exposure to the small cap segment. The ETF is comprised of stocks throughout 11 different sectors, with the five biggest areas of exposure being a mix of growth and value segments like health care (the largest), consumer cyclicals, industrials, financial services, and technology (the smallest).

Salamone noted that investors may want to keep these main sectors in mind when putting together their portfolios.

“The interest rate environment in recent months has favored financial services and industrials, and consumer cyclicals are a great way to position yourself for an economic rebound.”

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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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