Best small-cap stocks to play an economic recovery, according to Bank of America

Published Mon, Aug 28 20232:34 PM EDTUpdated Mon, Aug 28 20233:02 PM EDT

Bank of America is getting more optimistic on an economic recovery — and it believes the biggest winners in the inflection period could be small-cap stocks. The firm's U.S. Regime Indicator was in the downturn phase for six months but showed an improvement in July. Further advancement in August would officially mark a shift to an early-cycle recovery. Historically, this is the best phase for small caps, according to strategist Jill Carey Hall. "For small cap investors looking to hedge cycle risk, factors that have consistently outperformed in both Downturn and Recovery regimes include Cash Return (Div. Yield & Share Repurchase) and FCF/EV," Hall wrote in an Aug. 18 note. In her screen of the month, Hall looked for buy-rated Russell 2000 stocks based on certain criteria, including the following: Value: top quintile of the index on either cash flow from operations/price, EBITDA/EV, sales/EV, book/price or free cash flow/EV. Cash return: dividend payer or buying back shares in the last 12 months. Earners: nonearners are excluded from the list. Names with high levels of short interest were also left out. Take a look at some of the names on the list below, and where analysts see them going forward. Energy names Northern Oil and Gas and Chord Energy both made the list. In July, RBC Capital said it sees the possibility of Chord Energy going above its 75% minimum shareholder payout. Shares have gained 14% year to date. The average analyst price target on shares suggests 17% additional upside, according to Refinitiv. Analysts are similarly bullish on Northern Oil and Gas shares. More than 90% of analysts covering the stock rate it a buy, per Refinitiv, with their average price target implying 21.5% upside potential. Shares have popped more than 30% in 2023. Urban Outfitters is on the list, but Wall Street isn't so sure about the stock, with seven out of 15 analysts covering Urban Outfitters rating it a hold. The consensus analyst price target is $38.82, which implies shares could rally more than 16% from Friday's close. Notably, Urban Outfitters doesn't pay a dividend. Shares are up about 40% in 2023. URBN YTD mountain Urban Outfitters shares Dental products supplier Patterson Companies also made the list of promising small-cap names as the economy begins an inflection stage. Four-fifths of analysts covering the stock give it a hold rating, and the average price target suggests only 5.3% upside potential. The stock has added 20% year to date. — CNBC's Michael Bloom contributed to this report.