The gains in small-capitalization stocks will extend into next year and beat shares of companies with bigger names, analysts at Jefferies predict.
The investment bank estimates that the small-capitalization oriented Russell 2000 index
RUT,
will climb 12.5% in 2021, even though the index is already up 10.7% so far in 2020.
The Russell 2000’s year-to-date gains have helped it to outperform other benchmarks like the Dow Jones Industrial Average
DJIA,
which is up a more subdued 5.2% as of Dec. 1. Small-caps, however, do trail the S&P 500 index
SPX,
which has advanced more than 13% so far in the year and the Nasdaq Composite Index
COMP,
which has so far put in a 37% rise.
Next year, however, Jefferies is forecasting that small-caps will deliver an even more decisive beat against larger-caps, partly based on the belief of a sharp rebound in the economy that could also see merger activity pick up.
“Our absolute valuation model is stretched, but small should beat large by 6.4% over the next 12 months,” Jefferies wrote.
“We estimate earnings to rise 40%, putting the index’s [price-to-earnings] at 31.8x. If we are correct, this would be first time since ’16 that small beat large,” they said.
“The Jefferies forecast is for US GDP to come in at 4%, and when GDP is this high, small has gained nearly 17%. More important, GDP will accelerate in ’21 vs. ’20 and when that happens, small rises 24%,” the analysts, led by Steven DeSanctis, equity strategist, wrote Tuesday.
The outlook for small-caps from the investment bank comes after the Russell 2000 put in its best monthly return, up 18.29%, in its history, a performance that far outpaced its larger-cap peers in November.
Many investors are anticipating that a hoped-for return to economic normalcy in the wake of a rollout of a COVID-19 vaccine will help to deliver a sizable jolt to economic activity, with smaller companies, the most sensitive to economic weakness, benefiting the most from an improved climate.
All this said, DeSanctis and company says that smaller-caps are no longer cheap and that performance overtime as valuations creep higher will be more subdued.
The sizable returns in shares of smaller companies also come as investors seek out areas of the market that have lagged behind during the pandemic and are now theoretically ripe for better performance than some of their tech-related and work-from-home companies that have seen their stocks rocket higher.
