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Discounted small-cap stocks 'poised to outperform large-caps' - UBS

Published 03/07/2024, 04:19 AM
Updated 03/07/2024, 04:22 AM
© Reuters Discounted small-cap stocks 'poised to outperform large-caps' - UBS
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UBS strategists maintained a bullish stance on small-cap stocks on Tuesday, predicting they will outshine their large-cap counterparts in the coming period.

The broker’s thesis is based on its recent analysis which points out that not only are small-caps significantly undervalued compared to large-caps, but their valuations also appear attractive when measured against their historical performance.

In terms of key catalysts, easier access to capital, improved environment for mergers and acquisitions, positive shifts in business sentiment – as indicated by the ISM Manufacturing index –- possible cuts in Federal Reserve rates, and an uptick in earnings growth “are all catalysts that should drive small-cap outperformance,” strategists said in the note.

Meanwhile, UBS said some investors have been voicing concerns over the Russell 2000 small-cap index, noting that 40% of its companies were unprofitable in the past year, representing 28% of the index's market cap due to their smaller size.

However, the investment firm’s analysis reveals that the vast majority of these non-profitable firms have enough cash reserves to operate for years to come, with only 5% at risk of running out of funds within two years, assuming steady cash burn rates.

“Overall, we continue to think the risk-reward for small-caps is appealing, underpinned by low valuations and potential catalysts,” strategists said.

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