Forget big cap stocks. Bank of America’s top small-and-mid cap stocks
From multi-week losing streaks to bear market rallies, it’s been a roller coaster ride for markets this year as investors weigh the risks of a more aggressive monetary policy and a growing chorus of recession warnings. Major US indexes saw big bounces in Tuesday trading, reversing last week’s declines, but remained deep in the red this year. The S&P 500 and Nasdaq Composite are down more than 20% and 24%, respectively, this year, putting them in bear market territory. The Dow Jones Industrial Average is down 16.6% in the same period. While investors may be focused on bigger and more well-known names in the market, Bank of America believes some small- and mid-cap stocks present an opportunity for investors. Bank of America’s list of 26 « best small-and-mid cap ideas » for 2022 have an average potential upside of 60% over the next 12 months, the bank’s strategists, led by Jill Carey Hall, said on June 21. Inflation hedges The bank noted that stocks with defensible margins and pricing power have been rewarded in an environment of rising interest rates and soaring inflation. Stocks that are well positioned to thrive in such an environment include food delivery platform DoorDash , which the bank says is « resilient to raw goods and food price inflation. » Such price pressures can even be accretive to the DoorDash’s margins, the strategists said. They forecast that margins will improve in 2023. The bank has a price target of $90 on the stock, which represents a 42.9% potential upside to the stock’s closing price of about $63 on June 21. The bank also likes Illinois-based Option Care Health as the « least exposed » to labor cost pressures. The bank also expects the stock to see further upside from future deals as it continues to deploy its improved free cash flow. Shares of the company closed at around $26 on June 21, implying a potential upside of 46.2% to the bank’s price target of $38. California-based aircraft leasing firm Air Lease is another of the bank’s top picks. Bank of America expects the company to benefit from a recovery in commercial aviation, with the worst of the pandemic now « in the past. » The company will also benefit from rising interest rates because of its ability to pass on higher cost of debt while seeking higher premiums from lower investment grade lessees, the strategists said. The bank has a price target of $55 on the stock — an implied upside of 77.4% to its closing price of around $31 on Tuesday. Recession-resistant names Bank of America’s list also includes several stocks it thinks are well positioned to weather a recession. Tech consulting firm Gartner is one such stock. The bank described it as a « high quality and defensive » name with sales, margins, and earnings upside. The company enjoys « strong demand » for its services, while its core research sales are relatively « recession resistant, » according to the bank. The bank’s price target of $340 implies a potential upside of 45.9% to the stock’s closing price of around $233 on June 21. Bank of America also likes discount retailer Ollie’s Bargain Outlet as a potential beneficiary of a shift in consumer behavior. The bank believes consumers will face increasing financial pressure with the roll-off of government support programs and easing inflation. « We expect this will drive trade-down to Ollie’s, where we found that prices are on average 36% below Walmart and Amazon, » Hall said. The bank has ascribed a price target of $75 on the stock, representing a potential upside of 25% to its closing price of around $60 on Tuesday. Electronics manufacturer Jabil is another Bank of America favorite. The bank says the company is leveraged to end-markets that are seeing secular growth and which are « generally recession proof. » The company counts Apple as a « significant customer. » The bank noted that Jabil has been able to expand revenues and margins despite supply chain challenges and inflation, while passing on cost increases to customers. Bank of America’s price target of $82 on the stock implies a potential upside of 51.9% to the stock’s closing price of around $54 on June 21.
