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Small-cap stocks were on investors’ radar last week. The Russell 2000 index turned in five straight days of gains for the first time since mid-July, according to CNBC analysis. And so investors may want to consider that particular asset class, especially amid rising volatility, according to some fund managers and analysts. “A few days ago … we bought a massive slug of stocks in the Russell 2000,” Dan Niles, founder and senior portfolio manager of the Satori Fund, told CNBC’s “Squawk Box” last week. “We’re in consumer staples stocks and Russell 2000 stocks,” said Niles, adding that Pepsi is the fourth-largest holding in his Satori Fund’s consumer staples basket. “That’s what I want to be in between now and year end especially with the geopolitical risks.” Investors have been bracing themselves for more volatility into the year-end as yields rise, the Israel-Gaza war continues, and oil prices increase. In a Oct. 9 note titled “When Turbulence Creates Opportunity: The Argument for Selectivity in SMID,” Citi said stocks have weakened across the board amid a steepening of the yield curve and rising long-term interest rates. But it made a case for selective quality and profitable small- and medium-sized companies. “In our view, depressed small cap valuations may provide an attractive entry point for core portfolios even when adjusted for today’s higher rate environment,” wrote the analysts led by David Bailin, Citi Global Wealth’s chief investment officer. “We suggest a focus on high quality small firms who have been left behind in the mega-cap surge, while avoiding low quality companies that are found in passive indices.” Such small- to mid-sized companies have outperformed in most decades in the past century, he added, saying it’s particularly true for the profitable ones. Both Citi and Morningstar said small-cap stocks now look cheaper than the broader market. “Quality SMID indexes currently trade at a 30% multiple discount to the S & P 500. We believe this presents an attractive entry point for multi-year holding periods,” Citi wrote. “While valuations are not a great short-term timing tool, when coupled with our outlook for moderating inflation and an eventual Fed pivot next year, we suggest building positions in the asset class.” Morningstar added that small-caps are now cheaper than the market “than at any other point for 20 years from a price/earnings perspective.” “Morningstar Equity Research currently sees small caps as the most attractive U.S. size segment,” it said in a Sept. 30 note. How to play small-caps One of the more popular ways to invest in small-cap stocks is through the iShares Russell 2000 ETF (IWM). The fund is designed to track the Russell 2000. And there’s the iShares Core S & P Small Cap ETF (IJR) , which tracks stocks in the S & P 600. Morningstar also named small-cap stocks it said has competitive advantages and attractive valuations. Those include auto parts company Gentex , packaged foods firm Ingredion , biotech firm Ionis Pharmaceuticals , financial services firm Evercore and motorcycle maker Harley-Davidson . Screen CNBC Pro screened the Russell 2000 for stocks that met the following criteria: Buy ratings from at least 60% of analysts covering them. Average potential upside of 50% or more. Market cap of at least $1.5 billion. Above or close to $10 per share in the previous session. At least five or more analysts cover the stock. These stocks showed up. — CNBC’s Michelle Fox and Fred Imbert contributed to this report.
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