- Small-cap stocks trade at the biggest discounts compared to large-cap stocks.
- David Sequera says changing consumer spending behavior is one of the long-term trends.
- This creates a great buying opportunity for investors with a long-term view.
Last year the stock market was on the bear side, and so was May this year.
The economy is expected to remain weak in the first half of this year as it rings in a relatively stagnant and potentially recessionary environment.
Dave Sequera, chief U.S. market strategist at Morningstar, said a notable takeaway from last year’s stock market was that there wasn’t much of a difference between large-, mid- and small-cap stocks when analyzing the lack of returns. about it.
Instead, investors spent a year shifting from growth to value stocks in search of safe havens. This adjustment realigned the valuations of stocks in various sectors.
Undervalued stocks have great opportunities if investors are willing to withstand the volatility to come and continue to do so for the long term, Sekera says. He designated small-cap stocks that trade at the greatest discounts compared to large-cap stocks.
One thing to note is that it may take some time for inventory to recover. His Dec. 31 notes from Morningstar also show that he has two rate hikes due, both in the first half of this year. The Federal Reserve is then expected to ease monetary policy, leading to a stock market rally.
But a window of investment opportunity is still open, Sekera said. If you are a long-term investor or can hold for at least three years, timing the market should not be your goal, he noted.
“What we do is try to give investors a good chance when we see a significant undervaluation. If you think about it,” Sekera said.
Below is a list of 12 small cap stocks Sekera provided to Insider. All of these are considered to be trading at heavily discounted prices. For example, popular ride-sharing app Lyft is a long-term intrinsic value estimate of a stock, offering an 80% discount compared to its fair value, which is based on the 700 stocks covered by the company.
The great thing about these stocks, he said, is that they influence long-term long-term trends.
One of these trends is the normalization of consumer behavior, he said. People didn’t want to go out during the pandemic. This has resulted in a significant shift in spending from service categories to consumer goods. Now it’s reversed and spending is moving back to services. Ride-sharing, high-quality bar beer, and travel-related businesses will continue to grow in demand.
Another trend, he noted, is the increased use of electric vehicles, which will increase the demand for lithium.
The caveat is that many of these small-cap stocks also have high uncertainty ratings. This shows how well Morningstar believes its forecasts match the company’s results. Ratings suggest that these stocks are at higher risk. However, based on discount levels and margins of safety, Sekera still believes investors will be rewarded over time.
Each slide contains a ticker, the company’s fair value price per share, and a star rating.