Small cap stocks are oversold, RBC says

A new voice has joined the chorus that is singing the praises of small cap stocks.

As reported in the Globe and Mail, RBC December 5 said small cap stocks are oversold.

In a research update to clients Lori Calvasina, who is head of equity strategy at that firm, explained the reasoning behind the idea as the firm concurrently provided a list of 32 ideas.

“Our work points to bottoming sentiment with relative valuations near the low-end of their historical range (even dating back to the dot-com bubble) and much improved balance sheets having taken advantage of the earlier lower rate environment, something we feel the group is not getting credit for,” the analyst said. “And importantly, now there’s a catalyst for small caps, the Fed. Small Caps typically outperform when the Fed starts cutting, an event reflected in consensus forecasts, but which seemed far off while investors were still debating a December hike. The worse than expected pickup in the unemployment rate and the better-than-expected moderation in inflation finally seemed to convince investors that the Fed was done and provide the spark that Small Caps needed to generate increased interest. Flows will be key to monitor, particularly in the 1st quarter of 2024 when we often see big changes in funds flow trends. It’s worth noting that while flows for Small Cap have generally been improving since mid-October, they have softened a tiny bit recently and bear watching. The push back to our call is that the economy of course still matters and should fears of a hard landing return, they’ll take their toll on the group while a better-than-expected economy in the year ahead could help to pull in more buyers.”

RBC best smallcap tech idea is Lightspeed (Lightspeed Stock Quote, Chart, News, Analysts, Financials TSX:LSPD).

“A cleaner, better positioned Lightspeed is emerging, as original skepticism around its ability to drive higher payment penetration without higher churn and pricing discounts for software has being disproven in recent quarters, with payments penetration increasing to 25 per cent (up from 21.8 per cent sequentially) and software ARPU growing in the high single digits, all coupled with a focus on profitability heading into FY24,” analyst Daniel Perlin said of the Montreal-based company.