Small caps
“I believe we will see a burst of outperformance,” said Jefferies U.S. equity strategist Steven DeSanctis. “The tide is beginning to turn a little bit….” Small caps lagged by 30 or 40 basis points in August, but the last two weeks have been better.”
The Russell 2000, a popular small-cap index, peaked on March 15, reaching a high of 2,360, but it has struggled to regain its previous high as indexes such as the S&P 500 hit new highs after new highs this summer.
The IWM iShares Russell 2000 ETF is popular among traders who want to invest in the Russell. Other small-cap exchange-traded funds include the Vanguard Russell 2000 Growth Index Fund ETF shares, the iShares Russell 2000 Growth ETF IWO, and the iShares Russell 2000 Value ETF IWN.
Other options include the Invesco S&P SmallCap 600 Revenue ETF RWJ, the Invesco S&P SmallCap Value with Momentum ETF XSVM, and the Vanguard Small Cap Growth Index Fund ETF shares VBK.
The Russell 2000 index ended the day at 2,286, up 0.6 percent. The Russell 2000 gained 2.1 percent in August, while the S&P 500 gained 2.9 percent.
Some analysts believe it is also about to break out on a chart.
“I think that scenario is on the table as long as the Russell 2000 is above 2,260,” said Ari Wald, technical analyst at Oppenheimer. “The action last week was significant in our work because it marked a reversal of the Russell 2000’s near-term downtrend. It surpassed its previous peak, setting a new high. The Russell has been undergoing a difficult consolidation period in recent months. It appears to be attempting to move higher.”
The previous high, 2,360, is the next level to watch, according to Wald. “The small caps are a dead giveaway. As long as they hold and begin to move higher, the market should benefit,” he said. According to Wald, the market is entering a seasonal downturn, but investors should look ahead to potential fourth-quarter gains.
“We’ve had this internal reprimand. “It wasn’t as deep as we had hoped,” he explained. “Given the action in the Russell 2000, there are signs that we are starting to inflect higher. We’re still in the midst of a weak seasonal window. September isn’t the best month to expect a breakout, but long-term investors should consider it.”
However, he added that as long as the Russell maintains its 2,260 level, the chances of a September seasonal correction are reduced. Wald said he likes technology because it should have a more consistent performance than other groups and is a good investment across a wide range of market capitalizations.
According to analysts, the action in small cap stocks is linked to a larger trade, and they move higher with value and cyclical stocks. Many analysts anticipate that value and cyclicals will begin to outperform through the end of the year, as the latest Covid outbreak peaks and economic data improves.
“To me, the most important thing going on here is Covid and delta,” said James Paulsen, chief investment strategist at Leuthold Group. “We’re preparing for a second round of a mini reopening where delta peaks and when it does, confidence returns, jobs reports improve, and portfolio managers return to cyclicals, small and international stocks.”
According to Paulsen, small caps rallied when the 10-year Treasury yield was rising in the spring, but then fell as rates fell. The closely followed benchmark 10-year note fell to 1.12 percent on August 4 and was at 1.30 percent on Wednesday. In comparison, the rate was 1.75 percent at the end of March.
“They aren’t cheap because their fundamentals aren’t good. Despite having excellent fundamentals, they are inexpensive,” Paulsen added.
According to DeSanctis, small cap earnings will increase by 40% in 2021 compared to 2019. Estimates for large caps are 25.5 percent higher than in 2019. “Large was better than small this time last year,” he said.
“The earnings appear to be good for a small business. Estimates continue to rise, but I don’t think investors believe the good times will last,” said DeSanctis.
According to DeSanctis, the S&P 600, a small cap index, has outperformed the Russell this year, rising 22 percent through the end of August. During the same time period, the Russell was up slightly more than 15%, while the S&P 500 was up 20%.
According to him, the S&P 600 has more value names, whereas the Russell has a high concentration of volatile biotech stocks.
Dip-buys
Five Below
In premarket trading, Five Below’s stock was down 8% after the company’s second-quarter revenue fell short of expectations. However, Jefferies analyst Randal Konik reiterated his overweight rating on the stock in a client note on Thursday, stating that the long-term bull case remains intact.
“FIVE stocks are reacting negatively to sales trends that slightly outperformed the market but are difficult to model in a COVID world. What matters is that 1) comps were up significantly (+21 percent vs. ’19), 2) new store growth remains strong (near mid-teens percent YoY), and 3) the Q3 outlook appears in line to slightly better, according to the note.
According to Jefferies, supply chain issues are affecting most retailers, but Five Below should be less impacted than competitors.
“Management acknowledged that the supply chain environment remains challenging to navigate. This is clearly an issue for all retailers, but the impact on FIVE appears to be fairly minimal at the moment, which speaks to the company’s supply chain flexibility and good execution,” the note stated.
Five Below has a price target of $300 per share set by Jefferies, which is roughly 39% higher than where the stock closed on Wednesday and 50% higher than where it was in premarket trading on Thursday.
Zoom Video
According to Wood’s Ark Invest’s daily activity log, the firm added more than 157,000 shares of Zoom Video to her flagship Ark Innovation ETF and more than 36,000 shares to the Ark Next Generation ETF. Based on Zoom’s closing price on Tuesday, the purchases were worth more than $56 million.
Zoom shares fell more than 16% on Tuesday after the company’s second-quarter report showed slowing growth. The stock of work-from-home companies is now down 14% year to date.
Wood has made a habit of buying stock dips in her favorite companies, such as DraftKings and Roblox.
In July, the investor stated that selling stay-at-home winners like Zoom and Roku as the pandemic faded would be a “mistake.”
“What we believe is that the coronavirus crisis changed the world dramatically and permanently, and when consumers and businesses find faster, cheaper, better, more productive, and creative — they aren’t going back to the old world,” Wood said.
Because Ark’s daily transaction list does not include the average purchase price of the stock, it is unclear whether Wood has already recorded an on-paper loss for the Zoom purchases.
On Tuesday, Ark added 260,000 shares of Robinhood to the Ark Fintech ETF. At Tuesday’s closing price, that’s about $11.5 million.
Last year, Wood’s funds outperformed the market during the pandemic, thanks to big performers like Zoom and Tesla. However, her bets have had a more mixed record in 2021, with the Ark Innovation ETF down slightly year to date.
Sunrun
Sunrun analyst Mark Strouse reiterated his overweight rating and added the stock to JPMorgan’s analyst focus list in a note to clients on Tuesday, predicting a bounce-back in the company’s shares in the months ahead. Since a disappointing quarterly report on Aug. 5, shares have struggled.
“While RUN is one of our top long-term picks within our coverage, we also believe RUN is uniquely positioned from a near-term perspective,” according to the note. “The stock has dropped 17% since the second-quarter print (the SP500 is up 2%), primarily due to investor concerns about margins and industry concerns about geopolitical disruptions to the supply chain. We anticipate a strong rebound in profitability in the third and fourth quarters, as the increased expenses in the second quarter were primarily due to timing issues.”
Sunrun also has a strong inventory position, which should allow it to deal with any product shortages that may occur in the industry, according to JPMorgan.
“We believe RUN can meet expected demand into early-22 using inventory on hand, which we believe positions the company better than tail installers (who account for the majority of US residential solar installations) in the event that supply is disrupted due to geopolitical… or lingering supply chain issues,” according to the note.
JPMorgan maintained its price target of $86 per share for Sunrun, which is 94% higher than the stock’s closing price on Tuesday.
Sunrun’s stock has struggled this year, following a surge in solar energy plays in late 2020. Shares are down 36% year to date.
