(This is the second of a three-part series featuring lists of top stock picks among analysts working for brokerage firms. Part 1 screens large-cap stocks, led by Nvidia Corp.)
The 2023 stock-market rally has been led by the “Magnificent Seven” companies, which have driven an accelerating upward trend for the large-cap benchmark S&P 500. Shares of smaller and medium-sized companies have also rallied, but not as much:
Returns during 2023 for the S&P Small Cap 600 and the S&P 400 Mid Cap Index have lagged the large-cap S&P 500.
FactSet
All three indexes are weighted by market capitalization, but the lack of an upward limit means the S&P 500 is more concentrated than the S&P Small Cap 600 Index
SML
or the S&P 400 Mid Cap Index
MID.
In fact, the Magnificent Seven — Apple Inc.
AAPL,
Microsoft Corp.
MSFT,
Amazon.com Inc.
AMZN,
Nvidia Corp.
NVDA,
Alphabet Inc.
GOOGL,
GOOG,
Tesla Inc.
TSLA,
TSLA,and Meta Platforms Inc.
META,
— make up more than 28% of the SPDR S&P 500 ETF Trust
SPY.
And when weighted by their market capitalization at the end of 2022, the Magnificent Seven have contributed 59% to the S&P 500’s total return this year through Dec. 21.
All returns in this article include reinvested dividends.
When considering smaller companies for investment, investors often focus on the Russell 2000 Index
RUT,
but the following screen begins with the S&P Small Cap 600 Index, which is more selective. Initial inclusion in the S&P Small Cap 600 requires companies to report four subsequent quarters of profitability, among other criteria.
This year’s rally follows broad declines during 2022. So here’s a look at total returns from the end of 2021 through Dec. 21, along with forward price-to-earnings ratios for all three broad S&P indexes:
| Sector or Index | Return since end of 2021 | Forward P/E | Current P/E to 5-year average | Current P/E to 10-year average | Current P/E to 15-year average | ||
| S&P Small Cap 600 | -3% | 14.3 | 98% | 94% | 98% | ||
| S&P Mid Cap 400 | 1% | 14.5 | 96% | 94% | 98% | ||
| S&P 500 | 3% | 19.6 | 102% | 109% | 121% | ||
| Source: FactSet | |||||||
The large-cap stocks as a group trade above their five-, 10- and 15-year weighted averages while the small-caps and midcap stocks trade below the averages.
Read: Beaten-down small-cap stocks are roaring back. Why they could soar in 2024.
Screening the S&P Small Cap 600
Starting with the full index, we narrowed the list to 385 companies covered by at least five analysts polled by FactSet. Then we pared the list to 91 companies with at least 75% “buy” or equivalent ratings.
Analysts working for brokerage firms typically assign 12-month price targets to the stocks they cover. Among the 91 companies, here are the 20 with the highest indicated upside potential for 2024, based on consensus price targets:
| Xperi Inc. | Ticker | Share “buy” ratings | Dec. 22 price | Consensus price target | Implied upside potential | Forward P/E |
| Vir Biotechnology Inc. |
VIR, |
88% | $10.11 | $32.00 | 217% | N/A |
| Arcus Biosciences Inc. |
RCUS, |
82% | $18.15 | $41.00 | 126% | N/A |
| Xencor Inc. |
XNCR, |
92% | $20.94 | $39.83 | 90% | N/A |
| Dynavax Technologies Corp. |
DVAX, |
100% | $13.84 | $24.80 | 79% | 185.0 |
| ModivCare Inc. |
MODV, |
100% | $43.89 | $75.50 | 72% | 6.8 |
| Xperi Inc |
XPER, |
80% | $10.68 | $18.20 | 70% | 30.1 |
| Ligand Pharmaceuticals Inc. |
LGND, |
100% | $71.51 | $114.80 | 61% | 16.8 |
| Ironwood Pharmaceuticals Inc. Class A |
IRWD, |
83% | $11.18 | $17.83 | 60% | 17.2 |
| Thryv Holdings Inc. |
THRY, |
100% | $20.60 | $32.75 | 59% | 25.5 |
| Catalyst Pharmaceuticals Inc. |
CPRX, |
100% | $16.58 | $26.20 | 58% | 13.8 |
| Green Plains Inc. |
GPRE, |
80% | $25.51 | $40.30 | 58% | 17.3 |
| Payoneer Global Inc. |
PAYO, |
100% | $5.12 | $8.00 | 56% | 21.3 |
| Patterson-UTI Energy Inc. |
PTEN, |
75% | $10.91 | $17.00 | 56% | 8.4 |
| Arlo Technologies Inc. |
ARLO, |
100% | $9.41 | $13.80 | 47% | 24.4 |
| Pacira Biosciences Inc. |
PCRX, |
100% | $33.05 | $48.40 | 46% | 9.6 |
| Helix Energy Solutions Group Inc. |
HLX, |
83% | $10.45 | $15.00 | 44% | 16.3 |
| Livent Corp. |
LTHM, |
75% | $17.23 | $24.34 | 41% | 10.1 |
| Talos Energy Inc. |
TALO, |
78% | $14.31 | $20.00 | 40% | 18.1 |
| Smart Global Holdings Inc. |
SGH, |
100% | $18.73 | $26.17 | 40% | 14.1 |
| Digi International Inc. |
DGII, |
100% | $26.16 | $36.14 | 38% | 12.8 |
Click on the tickers for more about each company.
Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
Forward P/E ratios aren’t available for the first three stocks on the list because analysts expect these companies to report negative earnings over the next four quarters.
Don’t miss: 13 stocks that are down for 2023 but may bounce back in 2024 or beyond
