January typically brings gains in certain small caps. Bank of America screened for names that could rally this time

Published Thu, Dec 28 20231:46 PM ESTUpdated Thu, Dec 28 20232:06 PM EST

Bank of America has some small-cap stocks worth considering entering a potential period of strength for the group. Investors will watch for the "January effect," a term that describes the tendency for stocks, especially small caps, to increase into the first month of the year. Strategist Jill Carey Hall said the rally is usually most pronounced among high-beta stocks, or names that are more volatile relative to the broader market. In fact, these stocks outperform the equal-weighted version of the Russell 2000 about three of every five times, with an average beat of almost 3 percentage points. Those potential forthcoming gains follow a year of underperformance for small caps as investors questioned the future path of interest rates. That's because higher interest rates are considered a problem for smaller companies as it makes borrowing money more difficult. Indeed, the small-cap focused Russell 2000 is on track to finish 2023 up 17%, while the large-cap S & P 500 has climbed about 25%. Given this environment, Hall screened for high-beta stocks in the Russell 2000 that the firm has buy ratings on. To find these, she looked for those that either ranked in the top quintile by one-year daily price volatility or five-year beta. Here are the 10 that made the list: Fox Factory made the list. The average analyst also has a buy rating on the stock with a price target implying shares can climb more than 30% next year, per LSEG, formerly known as Refinitiv. That would mark a rebound for the stock, which has fallen about 25% in 2023. Despite its poor performance, market participants say they like the company because of its focus on well-off hobbyist consumers who can better weather economic downturns. Still, uncertainty tied to the auto workers strike weighed on the suspension components maker earlier in the year. FOXF YTD mountain Fox Factory shares this year Solar stock Array also made this list. After slipping 12% this year, the typical analyst surveyed by LSEG has a buy rating and price target suggesting shares can surge more than 50% in the next 12 months. JPMorgan named the stock a top alternative energy pick earlier this month, noting it has a "very robust" project pipeline. UBS also said the stock is poised for gains , while Jefferies put a hold rating on the stock. Online learning stock Udemy was also among buy-rated names with high beta. While the average analyst has a buy rating, the price target suggest shares could shed nearly 1% over the next 12 months, per LSEG. That would mark a pullback after a strong year, with the stock on track to finish more than 40% higher. The stock got a boost last month after its earnings report. Udemy exceeded expectations for revenue in the third quarter, while also offering strong guidance on the line for the current quarter and full year. UDMY YTD mountain Udemy shares this year