BMO says there's a buying opportunity in small caps, gives a list of the best ones to buy

Published Wed, Mar 27 20242:57 PM EDTUpdated Wed, Mar 27 20243:50 PM EDT

The steady underperformance of small- and mid-capitalization stocks appears to be nearing an end after bouncing back this month, according to BMO Capital Markets. Since the start of the year, the S & P MidCap 400 index and S & P SmallCap 600 index have added 8.2% and 0.2%, respectively. The large-cap S & P 500, meanwhile, has gained roughly 9.5%. Over the past year, the small and midcap benchmarks are up 15% and 24%, respectively, while the large-stock index has soared 31%. March has proved to be a better month for so-called SMID-cap stocks, however, with the S & P MidCap 400 gaining about 4%, while its large-cap counterpart has added 2.4%. These trends suggest that a bottom may be forming for smaller stocks, which now have an "extremely attractive" relative valuation after struggling to keep up with fiery gains from large-cap names, BMO said. "From our perspective, both groups have been unfairly punished and we continue to see this relative weakness as a buying opportunity for investors especially considering the fundamental underpinnings for the group," strategist Brian Belski wrote in a Tuesday note. "However, given our expectation for price choppiness throughout the remainder of the year, we continue to advocate a highly selective approach when it comes to portfolio positioning." SMID stocks have rebounded sharply following similar relative underperformance over the past 20 years, Belski added. To play this trend, he listed several stocks in BMO's SMID-cap universe that the firm rates as outperform. Take a look at a selection of those names below: DoorDash is a top stock included in BMO's outperform-rated SMID-cap portfolio, which includes several companies above the general SMID-cap market cap levels as it may have not been rebalanced yet. Shares of the food delivery company have soared more than 40% this year and about 132% over the past 12 months, giving the company a market cap of roughly $56 billion. In a March 15 note, Piper Sandler analyst Thomas Champion noted DoorDash's position as the most expensive out of its peer group, but also the largest player in the growing on-demand U.S. food delivery market. The company's size allows it to further expand its market share and capitalize on shifting post-Covid consumer habits that lean more toward on-demand delivery services, he said. Software company Dynatrace , which has a market cap of about $13.7 billion, was also included on BMO's list. Morgan Stanley initiated the stock with an equal weight rating in mid-February, saying long-term "share gains should continue owing to strong technology, breadth of product and a consolidation opportunity where Dynatrace should emerge as a net-beneficiary." The firm's $60 price target suggests that shares of Dynatrace — which BMO Capital analyst Keith Bachman said last year will become a leader in the AI space — could gain 30.4% from Tuesday's close. Real estate investment trust CubeSmart , with a roughly $10 billion market, also made the cut. Analysts surveyed by FactSet have a $46.91 target price on the stock, suggesting about 5.6% potential upside. Other top stocks included in BMO's SMID-cap coverage include social media company Snap , discount retailer Ross Stores and electric power and natural gas supplier Constellation Energy .