Banks Think Small Cap Stocks Need to Catch Up: 3 Winners

The momentum trade has been exhausted by the large-capitalization stocks in the market, especially those in the technology sector, as names like Nvidia Co. NASDAQ: NVDA keep making new all-time highs. For this reason, quants at PGIM believe that Wall Street may soon rotate into small-capitalization stocks to squeeze further returns.

As the soldiers follow the general, stocks like SolarEdge Technologies Inc. NASDAQ: SEDG, AB Electrolux OTCMKTS: ELUXY, and even Antero Resources Co. NYSE: AR were once falling behind and could now catch up to the broader indexes. Each was tied to its own set of economic tailwinds, and analysts and institutions had enough reasons to boost and buy them.

Small businesses tend to outperform bigger ones during easing economic cycles. Now that the Federal Reserve (the Fed) is looking to cut interest rates in 2024, these small-capitalization names could help retail investors expand their wealth on the next wave of economic activity.

SolarEdge: Oil’s Ugly Cousin

Oil prices have finally broken out of their $80 a barrel ceiling, and analysts at The Goldman Sachs Group Inc. NYSE: GS believe it could go as high as $100 a barrel this year.

Because the Fed could likely cut interest rates by May or June 2024, or so do traders think, according to the FedWatch tool in the CME Group Inc. NASDAQ: CME, commodities like oil are advancing in the expectation of an economic breakout.

While most may run to energy stocks, others could spot the spillover opportunity in green energy stocks like SolarEdge. When oil becomes more expensive, alternative energy sources like solar become more attractive, which is where this stock comes into play.

There must be a reason why analysts think its earnings per share (EPS) could grow by as much as 330% over the next 12 months. EPS typically drives stock prices and valuations; SolarEdge stock trades at only 22% of its 52-week high despite these growth projections, a gap to be filled by investors with enough stomach to buy a small name.

Those at The PNC Financial Services Group Inc. NYSE: PNC had enough stomach, increasing their stock position by 41.5%, a roughly $585,000 purchase.

More than that, analysts now have a $109 price target on the stock, calling for 55% upside from today’s prices.

The Buffett Effect Hits Electrolux

Interest rate cuts could also affect the future trends in mortgage rates. Historically, mortgage rates (namely the fixed 30-year rate) follow the overall credit market, where the Fed’s interest rate reigns king.

Betting on the spur of new construction activity, as a result of added real estate demand from more accessible financing, Buffett bought homebuilding stocks like D.R. Horton Inc. NYSE: DHI and others.

New homes put up for sale typically bring appliances with them, whether it is in the kitchen or others like air conditioning. With 35% of its sales coming from the North American market, Electrolux could represent a viable way for investors to ride the side effects of this real estate boom.

This could be one of the reasons why Wall Street analysts expect more than 1,000% growth in earnings per share (EPS) in Electrolux for the next 12 months.

More than that, the stock trades at only 50% of its 52-week high, which happens to be a price not seen since the financial crisis of 2008; even with this bearish momentum as of late, short interest in the stock dropped by 62.5% in the past month, opening the way for new buyers to come in.

Antero Leading in Oil’s High

The same oil trends helping renewable energy stocks like SolarEdge are the ones that could bring Antero Resources higher. Oil is now trading at $85 a barrel, a price not seen since October 2023, bringing the cost of Antero stock back to its October 2023 levels.

At 96% of its 52-week high, the stock could break into a new prolonged uptrend if oil prices allow further expansion. Analysts and their 580% EPS growth projections could make this upward path a reality by showing Main Street where the juice is.

As of March 2024, J.P. Morgan Chase & Co. NYSE: JPM boosted their price targets for Antero stock to $32 a share, shooting for nearly 10% upside from today’s prices. Since oil has risen significantly since that last boost, investors could expect another round.

Being the macro asset manager it is, the Vanguard Group increased its position in Antero by 0.6% in the last quarter, a roughly $3.7 million purchase.