It's a Small World: 3 Stocks Leading the Sudden Rebound in Small Caps

Whether it’s withering jobs data, renewed signs of inflation or sluggish consumer spending, there’s been no shortage of concerning economic news over the past month. And yet, this gloomy backdrop has not only stoked rate cut hopes on Wall Street, but is also emboldening investors to “trade down”, if you will, and take riskier bets on some badly beaten small stocks.

Specifically, since August 11th, the Russell 2000 index (IWM -0.17%) has gained 8.1%, versus 4.2% for the Dow Jones Industrials (^DJI), 3.5% for Nasdaq Composite(^IXIC), and 3.3% for the S&P 500 (SPY -0.12%).

Historically, small cap leadership in the markets has been viewed as a bullish economic indicator, because smaller companies inherently carry more risk than their large cap peers when it comes to weathering a storm or slowdown.

Another reason why the ongoing outperformance by the IWM has caught my eye is that the rally has seen fairly broad-based participation. According to Koyfin data, as of the close of trading on Sept 12, there were more than 150 stocks in the Russell 2000 that were up 25% or more in the past 30 days.

Define small?

Statistically speaking, the latest FTSE Russell Fact Sheet from the end of August shows that the current median market value of the companies in the Russell 2000 is just shy of $1 billion — or $945 million to be precise. At the same time, there are close to a dozen companies in the “small cap” benchmark that are currently worth more than $10 billion — including high-flyers like Echostar (SATS -2.98%) and Hims & Hers Health (HIMS -5.69%) — both of which are also currently part of the S&P MidCap 400 (MDY -0.28%) as well as numerous other funds outside the small cap realm.

While the performance is noteworthy, it’s also important to note that despite the present short-term leadership change, the fact cannot be ignored that the Russell 2000 has lagged its large cap peers on a YTD, 1Y, 2Y, 3Y and 5Y basis and beyond.

Diving in

With the Federal Reserve set to meet this Wednesday and announce what is widely expected to be its first rate cut in 9 months, there are several things that could cut the small cap rally short, and shift investor interest elsewhere. For one, no rate cut. If the Fed stays on hold — despite intense external pressure to lower rates — that would likely be taken as a warning sign — particularly about inflationary risks — and send investors out of small caps and fleeing to safety.

With that in mind, and beyond having an broad allocation to the IWM itself, there are dozens of small cap stocks — from a range of sectors — that have been rallying and beating benchmarks of all sizes for many many months.

3 Mighty mites

Given the unique risks involved in owning individual small cap stocks, I wanted to single out a few top performers that met at least 3 criteria;

• 3 Different and Defensive Sectors
• Multi-Month + 1Y Outperformance
• Recent Earnings Surprise or News

With that in mind, here’s what I found.

Thanks to a 30-day window that has seen substantial insider buying, a smaller Q2 loss that was better than analyst expectations, and an oversubscribed secondary offering, shares of Mineralys Therapeutics (MLYS 3.34%) rose more than 140%. As a result, its market value now stands at more than $2.6 Billion and its 1-year gain is closing in on 200% as the Radnor, PA-based healthcare sector/biotech company moves forward with its development of treatments for chronic kidney disease and obstructive sleep apnea.

At the same time, within the consumer staples group, shares of coconut water producer Vita Coco (NASDAQ:COCO) popped on my radar, thanks to their 22% jump in the past month, and 47% advance over the past year. With a $2.3 billion market cap, the New York-based beverage firm beat analysts’ Q2 sales and EPS estimates, as its core Vita Coco brand grew 25%.

And lastly, within the traditionally defensive utility sector, shares of Oklo Inc (OKLO -0.24%) have been drawing attention the past month (+21%) as well as the past year (+1300%) as the stock set a series of new record highs. As a result, its very un-small cap-like market value of $12.8 billion is drawing the attention of numerous new investors and funds. Among the events driving the Santa Clara, CA-based nuclear power and waste-recycling company’s move higher lately include; a smaller Q2 loss of $0.18 per share vs a $0.27 loss a year earlier, a new “Buy” rating from Bank of America that highlights AI-driven power demand , and the award of 3 new trial projects from the US Department of Energy’s Reactor Pilot Program.

Like the broader markets, many of the leaders within the small cap universe fall within the technology sector, and have benefited from perceived links to the AI-revolution. While a leadership change like this can — and will — change along with market developments and conditions, at the very least it’s worth being aware of the trend and using the individual stock ideas as a starting point for further research.