Small cap stocks are “historically cheap,” analysts at Bank of America said in a new report Monday.
In the current stock market, where many investors are selling off their holdings, Bank of America’s report on the Russell indexes reveals interesting trends. The Price-to-Earnings (P/E) ratios for these indexes, especially the small-cap focused Russell 2000, have dropped, indicating potentially undervalued stocks.
Small-cap stocks are trading at a 19% discount compared to their historical averages, making them relatively cheaper. In contrast, large-cap stocks are at a 12% premium, suggesting they are comparatively more expensive.
For long-term investors planning over the next decade, the lower P/E ratios in the Russell 2000 imply a potential 12% annualized return, while the larger Russell 1000 may offer a 7% annualized return.
“An accelerating profit cycle also favors small cap value over growth – with even wider return spreads than in large caps,” analysts wrote.
Additionally, the preference for quality aligns with the value category, with fewer non-earners and a higher proportion of stocks boasting a B+ or better ranking by S&P Quality Rank in the realm of value stocks compared to growth stocks.
In essence, the recent success of small-cap value stocks is underpinned by their historical affordability, quality alignment, and the ongoing economic recovery.
For Bank of America analysts, Energy stocks offer the most value, securing the top rank in the quantitative framework that evaluates sectors based on relative valuation, revisions, technicals, and Bank of America analyst sentiment (upgrades-downgrades). Consumer Discretionary, which held the top position for three consecutive months, now moves to second place.
Conversely, Materials has experienced a significant decline in ranks, plummeting from the fifth spot to the last position. This decline echoes a similar trend observed in the large-cap sector analysis from the previous month, leading to a downgrade of Materials from overweight to marketweight.
Health Care, which was positioned at the bottom in the previous month’s ranking, has slightly improved and now holds the ninth-from-last rank in the current assessment.
Source: proactiveinvestors.com
