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  • Bank of America strategist Jill Carey Hall examined hundreds of small companies to find the ones that could provide strong returns while avoiding devastating risks.
  • She’s naming a series of companies that are secure because they’re highly liquid and have good balance sheets compared to other companies their size.
  • The group is exclusively made up of “Buy”-rated stocks with relatively good earnings and dividend growth rankings.
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The market’s smallest companies offer the most risk and the biggest rewards. And that’s never been more true than in the aftermath of the coronavirus outbreak, which poses an existential threat to many smaller businesses.

Small-cap stocks have suffered the biggest losses during the pandemic, and many experts think that means the same stocks are poised for the strongest recovery when the economy recovers. But investors who agree with their reasoning still have the problem of figuring out the best ways to find small-cap winners.

Bank of America equity and quantitative Strategist sill Carey Hall is offering one way to do that, examining the companies on the small-cap Russell 2500 index (excluding financial companies) to find strong companies that face less risk than their peers.

The result is 12 stocks that are rated “Buy” by Bank of America analysts and exceed a baseline threshold for volume traded. The companies also have strong balance sheets, as their net debt-to-EBITDA ratios are below the median for Russell 2500 non-financial companies. They’re also liquid, since their cash-to-market cap ratios are higher than the benchmark median.

The companies are also relatively strong according to S&P Global Markets Intelligence’s quality rankings, which measure earnings and dividend growth relative to their peers. Ratings of A- to A+ are above average, while the lowest-rated companies in Carey Hall’s screen received grades of B, slightly below average.

The 12 stocks arrived at by Bank of America are presented below in alphabetical order:

1. Allegiant Travel

Allegiant




Markets Insider



Ticker: ALGT

Sector: Industrials

Cash to market cap: 40%

Net debt to EBITDA ratio: 1.9  

S&P quality rating: B+

Source: Bank of America

2. BorgWarner

BorgWarner




Markets Insider



Ticker: BWA

Sector: Consumer discretionary

Cash to market cap: 19%

Net debt to EBITDA ratio: 0.7 

S&P quality rating: B+

Source: Bank of America

3. Columbia Sportswear

Columbia




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Ticker: COLM

Sector: Consumer discretionary

Cash to market cap: 16%

Net debt to EBITDA ratio: -0.5  

S&P quality rating: A-

Source: Bank of America

5. Copa Holdings

Copa Holdings




Markets Insider



Ticker: CPA

Sector: Industrials

Cash to market cap: 62%

Net debt to EBITDA ratio: 0.7  

S&P quality rating: B

Source: Bank of America

6. Dana

Dana




Markets Insider



Ticker: DAN

Sector: Consumer discretionary

Cash to market cap: 64%

Net debt to EBITDA ratio: 2.1

S&P quality rating: B

Source: Bank of America

7. Deckers Outdoor

Deckers Outdoor




Markets Insider



Ticker: DECK

Sector: Consumer discretionary

Cash to market cap: 21%

Net debt to EBITDA ratio: -0.9  

S&P quality rating: B+

Source: Bank of America

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8. G-III Apparel Group

G-III Apparel




Markets Insider



Ticker: GIII

Sector: Consumer discretionary

Cash to market cap: 54%

Net debt to EBITDA ratio: 1.8

S&P quality rating: B

Source: Bank of America

9. Jazz Pharmaceuticals

Jazz Pharmaceuticals




Markets Insider



Ticker: JAZZ

Sector: Healthcare

Cash to market cap: 18%

Net debt to EBITDA ratio: 0.7

S&P quality rating: B

Source: Bank of America

10. MDC Holdings

MDC




Markets Insider



Ticker: MDC

Sector: Consumer discretionary

Cash to market cap: 39%

Net debt to EBITDA ratio: 2.3  

S&P quality rating: B

Source: Bank of America

11. Meritage Homes

Meritage Homes




Markets Insider



Ticker: MTH

Sector: Consumer discretionary

Cash to market cap: 28%

Net debt to EBITDA ratio: 2.2

S&P quality rating: B

Source: Bank of America

12. Ralph Lauren

Ralph Lauren




Markets Insider



Ticker: RL

Sector: Consumer discretionary

Cash to market cap ratio: 37%

Net debt to EBITDA: 0.9

S&P quality rating: A

Source: Bank of America

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