It's been all about the biggest of the big S&P 500 stocks all year. But now, investors are starting to look for big gains from small stocks.
And analysts are most bullish on 11 S&P 600 SmallCap stocks, including health care play Avid Bioservices, Vir Biotechnology and Arcus Biosciences, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. All are expected to soar 90% or more in the next 12 months.
Such high expectations for ignored small-caps mark an important brewing shift in the market, away from the giants that drove the market all year, says Sam Stovall, strategist at CFRA. "Investors are now encouraged that small caps will have their day in the sun," he said.
Factors Working For Small Stocks
A series of fortunate events are setting up small stocks to outperform the S&P 500, Stovall says.
First, the S&P SmallCap 600 is trading for less than its long-term absolute and relative valuations based on earnings forecast in the next 12 months, Stovall said. The S&P 600 SmallCap trades for just 13.9 times forward earnings. That's lower than the 19.5 times P-E on the S&P 500 and lower than the average 18.3 times valuation on small caps since 2005, Stovall found.
But it's not just a cheap small-stock rally. Stocks in the S&P 600 SmallCap are expected to report 18.2% higher earnings in 2024. That's much faster growth than the 10.9% and 11% profit growth forecast for the S&P 500 and S&P 400 Midcap indexes, respectively.
Additionally, market cycles now bode well for small stocks, Stovall found. Small caps usually beat the S&P 500 following the last rate hike in previous cycles. They also outperform in the fourth quarter of preelection years for first-term presidents.
Above all, analysts simply have higher price targets for small stocks. The average price target goal for small caps is a jump of 16%. But not all price targets are equal.
Big Hopes For Small Caps
Most of the S&P 600 SmallCap stocks analysts have the highest hopes for are all down for the year. And that's not surprising as the whole asset class is lagging.
The SPDR Portfolio S&P 600 Small Cap ETF is up just 2.2% this year. That trails the SPDR Portfolio S&P 400 MidCap ETF's 5.2% gain and the 18.8% rise of the SPDR S&P 500 ETF.
Take analysts' favorite small stock for the next 12 months, Avid Bioservices. Analysts think shares of the drug manufacturer will soar nearly 230% over the next year. That gives it the highest upside of any small cap company. And yet, it's largely just a recovery play. Shares plunged more than 59% this year as investors brace for profit to fall 63% this fiscal year. Profit is seen jumping 267%, though, in fiscal 2025.
Vir Biotechnology, which is working on treatments for infectious diseases, is another high point. Analysts think shares will soar 205% in the next 12 months. But again, it's a case of a fallen stock, as shares are down more than 61% this year. The company, which made $3.83 a share in 2022, is seen losing $18.39 a share over the next five years.
It's been a rough year for small stocks. But analysts, and investors, know that won't last forever.
Analysts' Favorite Small Stocks
Highest expected stock gains in 12 months in S&P 600 SmallCap
| Company | Ticker | Implied upside | Sector |
|---|---|---|---|
| Avid Bioservices | 229.5% | Health Care | |
| Vir Biotechnology | 204.7% | Health Care | |
| Arcus Biosciences | 197.6% | Health Care | |
| DISH Network | 142.9% | Communication Services | |
| Enviri | 130.9% | Industrials | |
| Semtech | 105.5% | Information Technology | |
| REGENXBIO | 104.4% | Health Care | |
| Xencor | 98.2% | Health Care | |
| Viasat | 95.3% | Information Technology | |
| Ligand Pharmaceuticals | 93.1% | Health Care | |
| Organon | 92.2% | Health Care |
