Jefferies is telling clients to 'get cyclical' with these small caps it sees outperforming in 2021

Jim Conroy, CEO of Boot Barn
Adam Jeffery | CNBC

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Small caps are having a strong month as positive vaccine news and better-than-expected economic data outweighs the uptick in Covid-19 cases in the U.S.

"We feel our 'Get Cyclical' theme is JUST getting stronger," Jefferies' small- and mid-cap strategist Steven DeSanctis told clients.

The small-cap benchmark, the Russell 2000, is up more than 16% this month following bouts of good news around Covid-19 vaccines and strong economic data. The index is outperforming the S&P 500, which has returned 8% in the same time. Investors digested the news by rotating out of growth stocks and into those most beaten down by the pandemic.

"Even before the vaccine news, the macro backdrop for this theme was getting better," DeSanctis added. "The earnings revision ratio hit an all-time high, valuations still very affordable, the dollar continues to weaken, and steeper curve benefits these stocks."

Wall Street small-cap market guru DeSanctis said the group of cyclicals is poised for a strong 2021. An acceleration in GDP, earnings beats without share price reward and a pickup in M&A activity are all pointing to a year of outperformance for the small and mid-sized companies. However, DeSanctis emphasizes that it is still a stock-picker's sector.

Jefferies made a list of buy-rated small and mid-cap stocks that are going to see better sales growth in 2021. All the listed companies have had upward earnings, sales revisions, and trade at below-market multiples.

Here's a list of the firm's favorite small-cap ideas for 2021.

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