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31 Picks With ‘Big’ Upside: JPM

  • JPMorgan says investors can find “big upside opportunities” if they move away from growth stocks.
  • The firm’s analysts explained the key tailwinds set to drive outperformance for “smid-caps” in 2022.
  • They highlighted 31 stock picks, including several that have returned 100% or more.

With the technology-focused Nasdaq 100 entering correction territory with a 10% fall from its high, investors have been fleeing into other areas of the market in search of new sources of outperformance as interest rates rise and the

Federal Reserve

prepares to tighten monetary policy.

One beneficiary of this “dash from trash” is value-style stocks; the Russell value index has returned -1.5% year-to-date relative to the Nasdaq’s 9% decline.

This shift aligns with the expectations of many investment managers who were worried about the frothy valuations in high stocks.

“Inflation destroys high-multiple stocks,” John Bennett, a portfolio manager at Janus Henderson, told Insider in June. “It destroys today’s darlings. It destroys the Nasdaq, it destroys tech stocks.”

While investors look for opportunities in value stocks, one pocket that is often overlooked is small and midsized companies — a segment that tends to have high exposure to the value style.

The investment bank JPMorgan is betting on the so-called smid-caps, particularly for their value-exposure component.

“We see value being a clear driver of alpha this year too and thus a key metric behind the allocation recommendations we present in this report,” Eduardo Lecubarri, JPMorgan equity analyst, wrote in a note on January 7.

This view is part of a wider smid-cap outlook report that makes a bullish case for stocks with a market capitalization of $100 million to $5 billion in 2022.

“Our analysis shows SMidCaps benefitting from what remains a very strong macro outlook, which translates into solid fundamentals, while valuations remain undemanding, expectations appear far more realistic than in recent years, and technicals show big upside/alpha opportunities at the stock level,” Lecubarri said.

Many investors and analysts are worried about a decade of lower returns from the top US indexes such as the S&P 500 and the Nasdaq, but Lecubarri still sees big opportunities for outperformance at the stock-specific level in smid-caps.

“Big upside/alpha opportunities can still be found by those investors willing to move away from pricey multiples on rich growth expectations, and focus on stocks that offer a GARP proposition, or those with a still sizable recovery story,” he said.

Tailwinds for smid-caps in 2022

In the report, Lecubarri broke down five tailwinds he expects to drive this outperformance.

1. The macro environment continues to spell growth for smid-caps.

Consumer confidence chart from JP Morgan January 7 research note

A consumer-confidence chart from JPMorgan’s January 7 research note.

JP Morgan

Lecubarri highlighted several positive macro catalysts for smid-caps, such as commodities continuing to edge higher and consumers still having some “firepower left and a thirst to use it.”

2. Smid-caps are not overleveraged.

Graph of Net debt to EBITDA in UK, US/Canada and European markets from JP Morgan research note on January 7

A graph of net debt to EBITDA in the UK, the US and Canada, and European markets from JPMorgan’s research note.

JP Morgan

“Fundamentals continue to show SMids are not that leveraged and should continue to see double-digit EPS growth as margins continue to recover,” Lecubarri said.

3. Valuations aren’t stretched.

Forward P/E for smid-caps less large from JP Morgan January 7 research

Forward P/E for smid-caps less large from JPMorgan’s research note.

JP Morgan

“The relative value argument for SMid remains strong, especially given the operating upside that still lies ahead,” Lecubarri said. “On Apr 8th of 2020, we turned bullish on SMid, arguing that the relative value proposition of SMid-Caps, along with what was then a double-digit discount to their own historically average valuations, was a powerful combo that favored SMid over other asset classes.”

4. The sell side might be too cautious on smid-cap price targets.

Chart displaying sell-side price targets from JP Morgan note on January 7

A chart displaying sell-side price targets from JPMorgan’s note.

JP Morgan

“Sell-side analysts’ price targets expect the equity market to keep rallying and deliver double-digit gains in most regions over the coming 12 months … which looks achievable if we think about the next 12 months still being a recovery story with double-digit EPS growth. As for strategists, their price targets imply little upside in 2022!” Lecubarri said.

5. Technicals are strong.

30-day RSI measure from JP Morgan January 7 note.

The 30-day RSI measure from JPMorgan’s note.

JP Morgan

“All with technicals showing still plenty of opportunity at the stock level with perhaps more pent up performance left than many realize,” Lecubarri said.

Lecubarri added that the current reading of the 30-day relative strength index has historically been related to a 9.5% gain over the following six months among US smid-caps, with low- to mid-single-digit returns also in the UK and continental Europe.

Stock picks

Lecubarri said that some of these returns would be loaded into the first half of the year, with the summer months bringing relief that the equity market will quickly price in.

“We enter 2022 still with a preference for value vs yield plays, keeping our overweights on materials, industrials, and construction. Discretionary; being tactically long on financials and energy (which face short-term tailwinds, and structural challenges), and being underweight all yield plays (Staples, Utilities, Comm. Svcs),” Lecubarri said.

The report described opportunities for smid-cap portfolio managers to leverage, from stock screens to a model portfolio. We highlighted the European smid-cap stocks rated a buy that also appear in the smid-cap screens.

The information is as of January 7, when the report was released.