Small Cap Companies

In a year in which the risk-on trade has been muted, U.S. small cap stocks are holding up relatively well. In fact, the historically more volatile asset class is down approximately 13% year-to-date compared to 15% for U.S. large caps as measured by their respective S&P indices.

This isn’t a big discrepancy but is one that warrants a closer look. Is it because the small cap benchmark has a much higher weighting to energy names, i.e. 2022’s runaway winners? Nope. Energy stocks comprise around 5% of both the S&P 500 and S&P 600. 

The difference predominantly relates to the technology sector. Technology carries a 13% weight in the small cap index. This is roughly half the technology weight in the large-cap index where Apple, Microsoft, and Alphabet dominate—and are each down significantly this year.

Now that we understand why small caps are doing surprisingly well in this environment, let’s see which companies could be some of the biggest outperformers going forward. These three stocks are small in stature but have big-time upside over the next 12 to 18 months. 

Is it a Good Time to Buy The Cheesecake Factory Stock? 

The Cheesecake Factory Incorporated (NASDAQ: CAKE) is having a half-off sale. No, you didn’t miss out on a buy one get one free dinner promo. The stock is down 50% from its post-Covid peak. How could that be if restaurants have reopened and vaccines are proving effective?

Yep, it’s mostly because of the dreaded i-word— inflation. Rising food costs and wages are squeezing The Cheesecake Factory’s profits as they are at other higher end dining establishments. Yet the company is taking a more cautious approach than peers towards offsetting these costs. Menu prices are being increased only slightly, which doesn’t bode well for near-term profitability but does for customer loyalty. As consumers face inflationary prices everywhere, the ability to still enjoy an affordable Cheesecake Factory meal should go a long way in cementing a long-term diner base.

As inflation moderates, Cheesecake Factory will have a healthy customer base at its disposal. Earnings will improve and analysts will up their price targets. Buying now when market sentiment and valuations are low could lead to some very tasty returns. 

Will Abercrmobie & Fitch Stock Recover?

The weakness in Abercrombie & Fitch Co. (NYSE: ANF) also presents an attractive buy opportunity. Shares of the clothing retailer have pulled back 33% from their November 2021 peak mainly due to the impact of supply chain disruptions on inventory levels. This combined with rising Omicron cases at the beginning of the year made for a disappointing holiday quarter and a weak first quarter. 

Things should get better from here. As supply chain snags lessen, Abercrombie & Fitch will have more apparel to sell to youthful shoppers that swear by the Hollister and namesake brands. And as the Fed’s attack on inflation bears fruit, reduced freight expenses should help turn sales into better profits.

Abercrombie & Fitch’s biggest growth catalyst, however, could be its rapid shift towards digital. Long a mall-based retailer, the company’s revenue is split evenly between brick & mortar and e-commerce these days. As management continues to shift resources in this direction, A&F should evolve into a relevant clothier for the younger generations of online shoppers. An increasing cadre of 34 million social media followers is surely a solid base from which to grow.

The stock trades at less than 10x the current year’s earnings estimate, which makes it one of the best deals in retail. Even a (very plausible) return to the $40 level would equate to a 20% gain.

What is the Upside for Silk Road Medical Stock?

Silk Road Medical, Inc. (NASDAQ: SILK) ran 264% from Covid bottom to peak before giving up most of the gains. The good news is that the medical device maker is capable of extended rallies. And trading back around $30 per share, another big run isn’t out of the question. 

Price targets issued this year on Silk Road Medical average $39. But it is the high end of the target range that makes the stock intriguing. J.P. Morgan and SVB Securities see the carotid artery disease specialist returning to $52, not to be outdone by Stifel Nicholas which has a $55 bullseye. 

To attain these bullish targets, Silk Road Medical will need to demonstrate traction among surgeons with its novel Transcarotid Artery Revascularization (TCAR) approach. The minimally invasive procedure is designed to treat blockages in the arteries while preserving their structure to reduce the risk of stroke. 

Less than 10% of the carotid artery disease procedures performed in the U.S. last year used the TCAR approach. This means room for adoption is substantial. 

Silk Road’s quest to enhance awareness is spreading. It has gone all in on TCAR by investing in sales territory expansion, physician training, and label extensions. Beyond the immediate domestic opportunity, plans to seek TCAR approval in Japan and China hold tremendous growth potential.