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- JPMorgan Chase’s global head of small and mid-cap equity strategy says the market might be where it is for a long time, but there are choice industries primed for big rebounds.
- Eduardo Lecubarri told Business Insider about the smaller companies, sectors, and regions with the most potential as the market’s biggest firms got back to record highs.
- He’s telling investors to look for companies with strong balance sheets, solid business prospects, and stocks that have lagged the recent recovery.
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Smaller companies were hit harder by the coronavirus pandemic than their bigger peers were, and their recovery might be a lot slower.
While many small- and mid-size company stocks have surged over the last few months, unlike the market’s headliners, indexes of those companies are fairly far from record levels. If investors are counting on new economic stimulus and a coronavirus vaccine to help those stocks rally even further, they might be disappointed.
Eduardo Lecubarri, the global head of small and mid-cap equity strategy at JPMorgan Chase, says the stocks don’t have much upside for the rest of 2020 and all of 2021 — and they have just as much downside.
He notes that the broader market delivers returns in four general ways — price re-rating, economic growth, M&A, and dividend yields — and combined, it doesn’t look like those can deliver double-digit returns in the near future.
On the surface that might sound bearish, but he insists it’s not. Instead, it reflects deep divisions in the stocks he covers. Some are pricing in a powerful recovery in economic growth and profits that hasn’t materialized yet.
But then there are others that aren’t doing either. He argues that they’ve been left out of the market recovery even though their balance sheets and business prospects look pretty good.
“Forty percent of SMID caps are not pricing in much of anything [because they’re barely down],” he said in an exclusive interview with Business Insider. He adds that 20% of all small- and mid-cap stocks are still down at least 30% from their early-2020 highs.
“I think that’s where the opportunity lies,” he said. “The performance asymmetry that you’ve seen during this whole COVID-related downturn has been huge.”
But with easy money and stimulus efforts continuing, Lecubarri says it doesn’t make sense that European aerospace and defense, construction firms, and UK housing stocks are still down so sharply.
“If you look at UK housing, these companies are sitting on net cash. We’re going to go back to building homes,” he said. “I don’t think the likes of Boeing or Airbus are going to start opening to new suppliers of different parts. That’s an industry with big barriers of entry.”
Coronavirus stock Stocks with potential
Inchcape is a British-based car and car parts seller and Valeo is a French parts supplier. Lecubarri also recently highlighted another French company, Plastic Omnium, as a tempting opportunity.
Within Continental Europe, his recent research highlights consumer durables and apparel, tech companies and telecom services as promising areas for investment, while he calls UK retail and media companies some of the best opportunities in that region.
Breaking down his investment outlook regionally, he says there’s “more value in Europe than the US,” which he’s underweighting because of its high valuations. That includes positive views on Germany, Switzerland, Sweden, Finland, and Ireland.
Latin America also gets an “Underweight” tilt while Central and Eastern Europe and Asia (excluding Japan) are rated “Overweight.”
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