Small-cap stocks could be ready to snap back in January led by these quality names, top strategist says

Published Wed, Dec 22 202111:43 AM EST

Small-cap stocks are lagging far behind the major averages this quarter, but they could be due for a bounce in the new year, according to Jefferies strategist Steven DeSanctis. Though the Russell 2000 rallied nearly 3% on Tuesday, it remains lower on the quarter. The small-cap index is up about 12% year-to-date versus the S & P 500's roughly 24% gain. However, one historical trend suggests small-cap stocks are set to rebound in January, analysts led by DeSanctis said in a Dec. 22 research note. When small-cap names have been down in the fourth quarter, they return on average 4.7% in January and the group is positive on the month 72% of the time, according to Jefferies' analysis. "Over the last several years, we have seen the January Effect come early with stronger performance by small caps versus large caps, and the smaller small caps leading," DeSanctis said in the note. "That is NOT the case in '21, thus we may be set up to see a January Effect in January." To find the stocks that could lead the Russell 2000 higher next year, Jefferies found buy-rated names that are down in the fourth quarter but are higher quality, as measured by higher-than-average return on equity. Take a look at five stocks on their list. Bloomin' Brands , whose restaurant chains include Carrabba's Italian Grill and Outback Steakhouse, makes Jefferies' list. The firm recently named Bloomin' Brands a "franchise pick" as one of its highest conviction buy-rated stocks. "We believe BLMN is primed to benefit from positive structural changes in the US Casual Dining Category, such as supply contraction and op efficiencies," analysts said in a note last week. Callaway Golf also makes Jefferies' list of small-cap stocks poised to rally in January. The stock is also one of the firm's franchise picks. The firm is particularly bullish on Callaway's acquisition of sports entertainment company Topgolf, which operates driving ranges. "We believe that the market has yet to fully appreciate the Topgolf acquisition," analysts said last week. Also making the list is apparel retailer Urban Outfitters . The firm likes the company's strong brands in specialty retail, which include Urban Outfitters, Anthropologie and Free People. "We believe URBN's core brands are beneficiaries of the fashion cycle that emerged on the back-end of COVID and the growing demand for dressy and 'going out' attire as economies reopen," analyst Corey Tarlowe said in a note initiating coverage last month. Other small-cap names Jefferies highlighted include Dave & Buster's and Lamb Weston . —CNBC's Michael Bloom contributed reporting.

Exterior view of an Urban Outfitters store is seen in Pasadena, California, May 22, 2021.

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Small-cap stocks are lagging far behind the major averages this quarter, but they could be due for a bounce in the new year, according to Jefferies strategist Steven DeSanctis.