Small caps have slumped, but Jefferies says these cheap stocks are primed for a comeback

Published Mon, Jun 21 202111:51 AM EDTUpdated Mon, Jun 21 20212:05 PM EDT

Small caps have faltered recently amid the rotation back to growth stocks, but Jefferies is banking on several smaller names to rebound. The small-cap benchmark Russell 2000 is off by about 5% since hitting its peak in March after falling 4.2% just last week. The flattening of the yield curve — which signals less optimism towards economic growth — has pushed investors out of cyclical names and back into growth stocks. "The flattening of curve rocked many themes along with repositioning as measured by ETF flows," Jefferies small-cap analyst Steven DeSanctis told clients. "However, backdrop for Small, Cyclicals, Value continues to get better; estimates heading up, valuations attractive, forecast for economic growth a bit rosier." Jefferies said the picture of cyclicals is improving. Valuations for cyclicals have edged up to the 9th percentile, earnings and sales revision ratios hit new all-time highs for the group and earnings growth estimates are tracking higher. "Even though the market is off 5% since 3/15, the rotation back to lower quality has been a thorn in the side of active. The poor showing by active is exactly what happened in January and then active rebounded sharply. We think this happens again with persistent once the lower quality names finally roll over," DeSanctis said. Gearing up for the rebound in small caps, Jefferies screened for buy rated stocks that have lagged since the March top. These stocks are also cheap, the firm said. "The overall SMID-Cap size segment is down 5% since March 15 but quite a few stocks have been hit harder. Some of the stocks that have been hit have actually seen earnings and revenue estimates move higher and now these stocks are cheap," DeSantics said. Lithia Motors , Marriott Vacations , Bally's Corp . and Ollie's Bargain Outlet all make Jefferies' list. Shares of Lithia Motors are down approximately 23% from their high, and shares of Marriott Vacations have slipped about 17% from their high. Bally's Corp. and Ollie's Bargain Outlet are down about 30% apiece from their 52-week highs. Kohl's is down nearly 20% from its high despite the retailer reporting a strong sales beat last month and hiking its earnings forecast for the year. The company earned $1.05 per share in the previous quarter, excluding one-time adjustments. That outpaced expectations of 4 cents in Refinitiv's survey. Kohl's said its store sales more than doubled during the quarter, while digital sales rose 14% year over year to represent 30% of total sales. Kohl's also raised its full-year adjusted earnings per share outlook to a range from $3.80 to $4.20 from $2.45 to $2.95. Pacira Biosciences , Sotera Health and PGT Innovations are also expected to rebound, according to Jefferies. Jefferies also likes Interactive Brokers heading into the back-half of 2021. Interactive Brokers is down about 20% from its high despite elevated retail investing activity. The brokerage is slated to start trading cryptocurrencies on its platform by the end of the summer. — with reporting from CNBC's Michael Bloom.

In this photo illustration, the Interactive Brokers LLC logo seen displayed on a smartphone.

Igor Golovniov | LightRocket | Getty Images

Small caps have faltered recently amid the rotation back to growth stocks, but Jefferies is banking on several smaller names to rebound.

The small-cap benchmark Russell 2000 is off by about 5% since hitting its peak in March after falling 4.2% just last week.

The flattening of the yield curve — which signals less optimism towards economic growth — has pushed investors out of cyclical names and back into growth stocks.