The Russell 2000 Index soared 12% in December, which might reflect investors’ exuberance about the state of the U.S. economy — it appears the Federal Reserve has won its battle against inflation.
But if you are looking to broaden your exposure to the stock market beyond the large-cap S&P 500
,
buying shares of a fund that tracks the Russell 2000 Index
might not be the best way to do it. This is because the Russell 2000 isn’t selective — it is made up of the smallest 2,000 companies by market capitalization in the Russell 300 Index
,
which itself is designed to capture about 98% of the U.S. public equity market.
A better choice might be the S&P Small Cap 600 Index
because S&P Global requires companies to show four consecutive quarters of profitability to be initially included in the index, among other criteria.
Below is a screen of analysts’ favorite stocks among the S&P Small Cap 600, along with another for the Russell 2000.
Watch for a “head fake”
Much of the small-cap buying in December might have resulted from covering of short positions by hedge-fund managers. This idea is backed by the timing of trading activity immediately following the Federal Open Market Committee’s announcement on Dec. 13 that it wouldn’t change its interest-rate policy, according to MacroTourist blogger Kevin Muir. The Fed’s economic projections released the same day also indicate three cuts to the federal-funds rate in 2024.
Heading into the end of the year, a fund manager who had shorted small-caps, and then was surprised by the Fed’s interest-rate projections, might have scrambled to buy stocks it had shorted to close-out the positions and hopefully lock in gains, or limit losses.
That buying activity and resulting pop in small-cap prices could set up a typical “head fake” for investors as the new year begins, according to Muir.
The long-term case for quality
Looking at data for companies’ most recently reported fiscal quarters, 58% of the Russell 2000 reported positive earnings per share, according to data provided by FactSet. In other words, hundreds of these companies were losing money. These might include promising companies facing “binary events,” such as make-or-break drug trials in the biotechnology industry.
In comparison, 78% of companies among the S&P Small Cap 600 were profitable, and 93% of the S&P 500 were in the black.
Here are long-term performance figures for exchange-traded funds that track all three indexes:
ETF | Ticker | 2023 | 3 years | 5 years | 10 years | 15 years | 20 years |
iShares Russell 2000 ETF | 17% | 7% | 61% | 99% | 428% | 365% | |
iShares Core S&P Small Cap ETF | 16% | 25% | 69% | 129% | 540% | 515% | |
SPDR S&P 500 ETF Trust | 26% | 34% | 108% | 210% | 629% | 527% | |
Source: FactSet |
An approach tracking the S&P Small Cap 600 has outperformed the Russell 2000 for all periods, with margins widening as you go further back.
Brett Arends: You own the wrong small-cap fund. How to get into a better one.
Looking ahead for quality… or not
For the first screen, we began with the S&P Small Cap 600 and narrowed the list to 385 companies covered by at least five analysts polled by FactSet. Then we cut the list to 92 companies with “buy” or equivalent ratings among at least 75% of the covering analysts.
Here are the 20 remaining stocks among the S&P Small Cap 600 with the highest 12-month upside potential indicated by analysts’ consensus price targets:
Company | Ticker | Share “buy” ratings | Dec. 29 price | Consensus price target | Implied 12-month upside potential |
Vir Biotechnology Inc. | VIR | 88% | $10.06 | $32.00 | 218% |
Arcus Biosciences Inc. | RCUS | 82% | $19.10 | $41.00 | 115% |
Xencor Inc. | XNCR | 92% | $21.23 | $39.83 | 88% |
Dynavax Technologies Corp. | DVAX | 100% | $13.98 | $24.80 | 77% |
ModivCare Inc. | MODV | 100% | $43.99 | $75.50 | 72% |
Xperi Inc | XPER | 80% | $11.02 | $18.20 | 65% |
Thryv Holdings Inc. | THRY | 100% | $20.35 | $32.75 | 61% |
Ligand Pharmaceuticals Inc. | LGND | 100% | $71.42 | $114.80 | 61% |
Green Plains Inc. | GPRE | 80% | $25.22 | $40.30 | 60% |
Patterson-UTI Energy Inc. | PTEN | 75% | $10.80 | $17.00 | 57% |
Ironwood Pharmaceuticals Inc. Class A | IRWD | 83% | $11.44 | $17.83 | 56% |
Catalyst Pharmaceuticals Inc. | CPRX | 100% | $16.81 | $26.20 | 56% |
Payoneer Global Inc. | PAYO | 100% | $5.21 | $8.00 | 54% |
Helix Energy Solutions Group Inc. | HLX | 83% | $10.28 | $15.00 | 46% |
Arlo Technologies Inc. | ARLO | 100% | $9.52 | $13.80 | 45% |
Pacira Biosciences Inc. | PCRX | 100% | $33.74 | $48.40 | 43% |
Privia Health Group Inc. | PRVA | 100% | $23.03 | $32.53 | 41% |
Semtech Corp. | SMTC | 92% | $21.91 | $30.90 | 41% |
Talos Energy Inc. | TALO | 78% | $14.23 | $20.00 | 41% |
Digi International Inc. | DGII | 100% | $26.00 | $36.14 | 39% |
Source: FactSet |
Any stock screen should only be considered a starting point. You should do your own research to form your own opinion before making any investment. one way to begin is by clicking on the tickers for more about each company.
Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
Moving on to the Russell 2000, when we narrowed this group to stocks covered by at least five analysts polled by FactSet, we were left with 936 companies. Among these, 355 have “buy” or equivalent ratings among at least 75% of the covering analysts.
Among those 355 stocks in the Russell 2000, these 20 have the highest implied upside over the next year, based on consensus price targets:
Company | Ticker | Share “buy” ratings | Dec. 29 price | Consensus price target | Implied 12-month upside potential |
Karyopharm Therapeutics Inc. | KPTI | 75% | $0.87 | $6.00 | 594% |
Rallybio Corp. | RLYB | 100% | $2.39 | $16.50 | 590% |
Vor Biopharma Inc. | VOR | 100% | $2.25 | $15.44 | 586% |
Tenaya Therapeutics Inc. | TNYA | 100% | $3.24 | $19.14 | 491% |
Compass Therapeutics Inc. | CMPX | 86% | $1.56 | $9.17 | 488% |
Vigil Neuroscience Inc. | VIGL | 88% | $3.38 | $18.75 | 455% |
Trevi Therapeutics Inc. | TRVI | 100% | $1.34 | $7.33 | 447% |
Inozyme Pharma Inc. | INZY | 100% | $4.26 | $21.00 | 393% |
Gritstone bio Inc. | GRTS | 100% | $2.04 | $10.00 | 390% |
Actinium Pharmaceuticals Inc. | ATNM | 83% | $5.08 | $23.36 | 360% |
Lineage Cell Therapeutics Inc. | LCTX | 86% | $1.09 | $4.83 | 343% |
Century Therapeutics Inc. | IPSC | 86% | $3.32 | $14.67 | 342% |
Acrivon Therapeutics Inc. | ACRV | 100% | $4.92 | $21.13 | 329% |
Avidity Biosciences Inc. | RNA | 100% | $9.05 | $37.50 | 314% |
Longboard Pharmaceuticals Inc. | LBPH | 100% | $6.03 | $24.17 | 301% |
Omega Therapeutics Inc. | OMGA | 100% | $3.01 | $12.00 | 299% |
Allogene Therapeutics Inc. | ALLO | 82% | $3.21 | $12.79 | 298% |
X4 Pharmaceuticals Inc. | XFOR | 86% | $0.84 | $3.26 | 289% |
Caribou Biosciences Inc. | CRBU | 89% | $5.73 | $22.25 | 288% |
Stoke Therapeutics Inc. | STOK | 78% | $5.26 | $19.33 | 268% |
Source: FactSet |
That’s right — this Russell 2000 list is all biotech. And in case you are wondering if any companies are on both lists, the answer is no.
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