Goldman’s favorite small caps that are cheap, growing and stable – HiGood
Despite the Russell 2000 giving back a chunk of its early 2023 gain, Goldman Sachs still has recommendations for playing small-cap names. The 2,000-stock index is up about 2.4% year to date, but is 10.3% off its closing high this year as of Monday’s close. Meanwhile, the broad S & P 500 has risen 4.3% so far in 2023. Analyst Deep Mehta said the drop-off has mainly come from sensitivity in economic growth, the focus on cost of capital. Mehta also noted differences in sector composition, with the Russell 2000 having higher exposure to banks than the Russell 1000 , while having less exposure to technology. .RUT .SPX YTD mountain The Russell 2000 vs. the S & P 500 Small-cap stocks have been largely viewed as the laggards this year, with investors reentering mega-cap names and growth stocks on hopes of a change in the path of interest rates. Still, Mehta points out that there are stock-picking opportunities in the small names following this recent correction. With this landscape in mind, Mehta screened for stocks with growth and free cash flow improvement. These are important qualities to watch for given that top-line growth is expected to be more difficult to achieve this year. To find these names, he screened for stocks with buy ratings from Goldman that have: market caps bigger than $5 billion; year-over-year sales growth of at least 5% expected for 2023 and 2024; positive free cash flow expected for this year and then growth anticipated in 2024; and a 2024 expected net-debt-to-EBITA ratio less than two times with some exclusions. Financial stocks were excluded from this screen. Here are the 10 stocks that passed Mehta’s screen: Halozyme Therapeutics shares are down about 40% year to date due to concerns that its royalty payments could be hurt by patent issues in Europe and by Medicare drug-price negotiations in the U.S. But after reporting mixed first-quarter results, Halozyme reaffirmed its full-year expectations. In upgrading the stock to overweight on May 10, Piper Sandler said, “We believe the royalty business, despite some longer-term uncertainty, is still well positioned in the near-term to continue its meaningful growth trajectory within the current commercial portfolio along with significant catalysts across the partner pipeline.” Tax stock Vertex , on the other hand, has rallied 47.5% so far this year — despite the market’s gyrations. Earlier this month, the company reported first-quarter earnings that were in line with FactSet’s consensus estimate, while slightly beating the Wall Street forecast on revenue. Vertex also issued current-quarter and full-year guidance for revenue and adjusted EBITDA that was largely in line with analyst expectations. Vita Coco has rallied even further with a more than 77% advance this year. The beverage company outpaced analysts’ expectations in the first quarter, more than tripling its profits from a year ago. It now expects its sales to grow between 9% and 12% in 2023. Energy stock Weatherford International gained 17.4% this year. The company beat earnings and revenue expectations in the first quarter, with management noting strong international activity drove growth despite some softness in the North American market. Raymond James analyst James Rollyson initiated coverage of the stock at a strong buy earlier this month, saying its turnaround seems complete with a newly strong balance sheet and compelling valuation. His $100 price target implies an upside of 64.9% from where the stock closed Monday. “Weatherford’s new leadership has spent the better part of the past three years shifting the company’s focus to profitability and reestablishing credibility with investors,” he said in a note to clients in early May. “In our review of results, margins, and the balance sheet, we would say the mission has been successful.” — CNBC’s Michael Bloom contributed to this report
