Wells Fargo picks high-quality small-caps for 2022: Alpha Tactics

Small Cap write on sticky notes isolated on Office Desk. Stock market concept

syahrir maulana/iStock via Getty Images

  • Quality stocks are likely to outperform in the coming months, if not quartersa, Wells Fargo's equity team says.
  • "The valuation premium to move up in quality (both large and small-cap) is historically low based on the narrow spread in median B/P between high- and low-quality baskets," Chris Harvey, head of equity strategy, writes in a note. "Quality typically outperforms in a low-growth/slowing economy and when credit spreads consolidate/widen due to their more stable earnings and less-levered balance sheets and (the quality) style historically has provided an attractive return distribution of upside participation with strong downside protection - justifying a premium multiple, in our view."
  • They determine quality by net debt-to-EBITDA (leverage), ROIC/ROE (efficiency) and net margins (safety).
  • The Wells Fargo High-Quality Small-Cap portfolio comprises stocks rated Overweight with a market cap of $500M to $6B and meet the "quality threshold on a sector-neutral basis."
  • The Russell 2000 (RTY) (NYSEARCA:IWM) is the benchmark.
  • Ther stocks are:
  • Communication Services, portfolio weighting 5.8%
  1. IMAX (NYSE:IMAX), 2.8%
  2. Tegna (NYSE:TGNA), 3.1%
  • Consumer Discretionary, 8.7%
  1. Academy Sports & Outdoors (NASDAQ:ASO), 1.9%
  2. Century Communities (NYSE:CCS), 2.5%
  3. National Vision (NASDAQ:EYE), 1.6%
  4. Shift Technologies (NASDAQ:SFT), 1%
  5. Signet Jewelers (NYSE:SIG), 1.7%
  • Consumer Staples, 5.9%
  1. Delek US Holdings (NYSE:DK), 1.9%
  2. Magnolia Oil & Gas (NYSE:MGY), 2%
  3. Whiting Petroleum (NYSE:WLL), 2.1%
  • Financials, 19%
  1. BankUnited (NYSE:BKU), 3.2%
  2. FNB (NYSE:FNB), 3.2%
  3. KKR Real Estate Finance Trust (NYSE:KREF), 3.2%
  4. PacWest (NASDAQ:PACW), 3%
  5. UMB Financial (NASDAQ:UMBF), 3.3%
  6. Umpqua Holdings (NASDAQ:UMPQ), 3%
  • Healthcare, 14.2%
  1. Axonics (NASDAQ:AXNX), 3.4%
  2. Ionis Pharma (NASDAQ:IONS), 3.9%
  3. Inari Medical (NASDAQ:NARI), 3.9%
  4. Sutro Biopharma (NASDAQ:STRO), 3.1%
  • Industrials, 15.3%
  1. Applie Industrial Tech (NYSE:AIT), 3.8%
  2. Brady Corp. (NYSE:BRC), 3.7%
  3. Hub Group (NASDAQ:HUBG), 3.8%
  4. MSC Industrial (NYSE:MSM) 3.9%
  • Info Tech, 16.2%
  1. Commvault Systems (NASDAQ:CVLT), 3.3%
  2. Momentive Global (NASDAQ:MNTV), 2.9%
  3. Rambus (NASDAQ:RMBS), 3.8%
  4. Semtech (NASDAQ:SMTC), 3.1%
  5. Tenable Holdings (NASDAQ:TENB), 3.1%
  • Materials, 1.7%
  1. Avient (NYSE:AVNT), 1.7%
  • Real Estate, 9.3%
  1. Highwoods Properties (NYSE:HIW), 3.1%
  2. Corporate Office Properties (NYSE:OFC), 3.2%
  3. Site Centers (NYSE:SITC), 3%
  • Utilities, 3.9%
  1. Brookfield Infrastructure (NYSE:BIPC), 3.9%
  • "Factor-wise, the portfolio is a touch more expensive—a worthwhile trade-off for having higher quality (particularly lower-leveraged), lower risk, and more stable earnings tilts," Harvey says. "It also is higher-yielding, contrarian (lower momentum), lower growth, and less-liquid names."
  • See the screen of Quant Rating's top-rated small-cap stocks.
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.