As small caps hit multi-decade lows, one fund manager reveals 3 stocks to buy

Published Mon, Mar 27 20238:15 PM EDT

The market sell-off earlier this month has hurt small-cap stocks more than their larger peers. Yet Josh Bennett, senior portfolio manager at Alger, believes the volatility has created opportunities for investors to pick stocks that will outperform in the medium to long term. Bennett named three such stocks on CNBC's "Squawk Box Europe" Monday: Core Laboratories , a company that helps oil and gas producers better understand the reservoirs where they extract oil and gas; Novanta , which designs and manufactures high-tech components such as lasers and sensors; and finally, Wingstop , a quick-service restaurant chain specializing in chicken wings. According to Bennett, these companies will be less impacted by macroeconomic trends, making them ideal investments in a challenging market environment. "At Alger, we look for companies with a durable competitive advantage and each of these companies has that," said Bennett, who manages the $640 million Alger Weatherbie Specialized Growth Fund. Core Labs is one of Bennett's top 10 largest holdings. Wingstop shares have risen over the past year by more than 60%. Most equity analysts covering the stock currently give it a hold rating, according to FactSet data. Core Labs shares have fallen by 35% over the same period, but analysts are most bullish toward the company, giving it a 13% upside. Bennett acknowledged that the tighter lending environment — since the turmoil in the banking sector started on Mar. 9 — has created challenges for smaller businesses. But it has also pushed multiple companies into Algier's valuation or market cap range. The S & P 600 small-cap index is down by 8% this month compared to the large-cap S & P 500 , which has regained nearly all of its losses over the month to date. .SPCY .SPX YTD mountain "On the smaller cap side, what we're seeing is that small-cap stocks are trading at the lowest valuation that we've seen in 20 years relative to the S & P 500," Bennett added. "The last time we were at these levels, we saw over 20% returns from that market over the ensuing years." Bennett also said small-cap growth stocks do better when leading economic indicators point toward a recession. Last week, DoubleLine Capital CEO Jeffrey Gundlach, nicknamed the "bond king," said the markets were flashing "red alert recession signals." Gundlach was referring to the Treasury yield curve, which is rapidly becoming less inverted and indicative of an economic downturn on the horizon. Meanwhile, Alger's Bennett believes that stocks in his fund rely more on innovation and technology than on industry or economy-level growth. "The companies that we look for are likely to perform on the other side of this [recession]," the portfolio manager said. "Whether it's innovative technology, innovative management, new processes, and ways of doing things, these are the leading companies that we think can rise above the current indicators."