Small-cap
stocks
were
on
investors’
radar
last
week.
The
Russell
2000
index
turned
in
five
straight
days
of
gains
for
the
first
time
since
mid-July,
according
to
CNBC
analysis.
And
so investors
may
want
to consider that
particular
asset
class,
especially
amid
rising
volatility,
according
to
some
fund
managers
and
analysts.
“A
few
days
ago
…
we
bought
a
massive
slug
of
stocks
in
the
Russell
2000,”
Dan
Niles,
founder
and
senior
portfolio
manager
of
the
Satori
Fund,
told
CNBC’s
“Squawk
Box”
last
week.
“We’re
in
consumer
staples
stocks
and
Russell
2000
stocks,”
said
Niles,
adding
that
Pepsi
is
the
fourth-largest
holding
in
his
Satori
Fund’s
consumer
staples
basket.
“That’s
what
I
want
to
be
in
between
now
and
year
end
especially
with
the
geopolitical
risks.”
Investors
have
been
bracing
themselves
for
more
volatility
into
the
year-end
as
yields
rise,
the
Israel-Gaza
war
continues,
and
oil
prices
increase.
In
a
Oct.
9
note
titled
“When
Turbulence
Creates
Opportunity:
The
Argument
for
Selectivity
in
SMID,”
Citi
said
stocks
have
weakened
across
the
board
amid
a
steepening
of
the
yield
curve
and
rising
long-term
interest
rates.
But
it
made
a
case
for
selective
quality
and
profitable
small-
and
medium-sized
companies.
“In
our
view,
depressed
small
cap
valuations
may
provide
an
attractive
entry
point
for
core
portfolios
even
when
adjusted
for
today’s
higher
rate
environment,”
wrote
the
analysts
led
by
David
Bailin,
Citi
Global
Wealth’s
chief
investment
officer.
“We
suggest
a
focus
on
high
quality
small
firms
who
have
been
left
behind
in
the
mega-cap
surge,
while
avoiding
low
quality
companies
that
are
found
in
passive
indices.”
Such
small-
to
mid-sized
companies
have
outperformed
in
most
decades
in
the
past
century,
he
added,
saying
it’s
particularly
true
for
the
profitable
ones.
Both
Citi
and
Morningstar
said
small-cap
stocks
now
look
cheaper
than
the
broader
market.
“Quality
SMID
indexes
currently
trade
at
a
30%
multiple
discount
to
the
S
&
P
500.
We
believe
this
presents
an
attractive
entry
point
for
multi-year
holding
periods,”
Citi
wrote.
“While
valuations
are
not
a
great
short-term
timing
tool,
when
coupled
with
our
outlook
for
moderating
inflation
and
an
eventual
Fed
pivot
next
year,
we
suggest
building
positions
in
the
asset
class.”
Morningstar
added
that
small-caps
are
now
cheaper
than
the
market
“than
at
any
other
point
for
20
years
from
a
price/earnings
perspective.”
“Morningstar
Equity
Research
currently
sees
small
caps
as
the
most
attractive
U.S.
size
segment,”
it
said
in
a
Sept.
30
note.
How
to
play
small-caps
One
of
the
more
popular
ways
to
invest
in
small-cap
stocks
is
through
the
iShares
Russell
2000
ETF
(IWM).
The
fund
is
designed
to
track
the
Russell
2000.
And
there’s
the
iShares
Core
S
&
P
Small
Cap
ETF
(IJR)
,
which
tracks
stocks
in
the
S
&
P
600.
Morningstar
also
named
small-cap
stocks
it
said
has
competitive
advantages
and
attractive
valuations.
Those
include
auto
parts
company
Gentex
,
packaged
foods
firm
Ingredion
,
biotech
firm
Ionis
Pharmaceuticals
,
financial
services
firm
Evercore
and
motorcycle
maker
Harley-Davidson
.
Screen
CNBC
Pro
screened the
Russell
2000
for
stocks
that
met
the
following
criteria:
Buy
ratings
from
at
least
60%
of
analysts
covering
them.
Average
potential
upside
of
50%
or
more.
Market
cap
of
at
least
$1.5
billion.
Above
or
close
to
$10
per
share
in
the
previous
session.
At
least
five
or
more
analysts
cover
the
stock.
These
stocks
showed
up.
—
CNBC’s
Michelle
Fox
and
Fred
Imbert
contributed
to
this
report.
