UBS Analysts Recommend Shift to Smaller Firms for Investors
In a recent report, UBS analysts have advised investors to consider redirecting their focus towards smaller firms, highlighting potential opportunities in the small- and mid-cap stock market. This recommendation comes as large-cap stocks have consistently outperformed their smaller counterparts in recent years.
Despite higher interest rate expectations, smaller firms have demonstrated resilience lately, prompting UBS to identify 40 promising small- and mid-cap stocks for investment. This shift in strategy aims to capitalize on the historical trend of smaller stocks outperforming larger peers by 2% annually in the long term.
The performance gap between large-cap and smaller stocks has been significant. While the S&P 500 has surged nearly 25% since 2022, the S&P 400 and S&P 600 indexes, representing mid-and small-cap stocks respectively, have lagged. Mid-caps have increased by 12.7% and small-caps by a modest 2.1% during the same period.
UBS analysts anticipate that this underperformance of smaller stocks may come to an end by 2025. However, they caution that economic and market challenges persist. High interest rates remain a concern, potentially impacting stock valuations, with smaller companies being more vulnerable due to their higher exposure to floating-rate debt.
Despite these challenges, UBS sees investment opportunities in the small- and mid-cap sectors. These stocks are currently trading below their 10-year average earnings multiples, presenting potential value for investors. Additionally, factors such as lower corporate taxes and deregulation could benefit these smaller firms.
To assist investors in navigating this market segment, UBS has compiled a list of 40 small- and mid-cap stocks they believe have high potential for 2025. The list spans various industries, including homebuilding, REITs, mining, semiconductors, and biotechnology. Notable companies on the list include Advanced Drainage Systems, Agree Realty, Alcoa, and Allegro Microsystems.
As the market landscape continues to evolve, UBS’s analysis suggests that a strategic shift towards smaller firms could be beneficial for investors. However, they emphasize the importance of careful stock selection and consideration of market dynamics to capitalize on these opportunities effectively.
Investors are advised to conduct thorough research and consider their risk tolerance before making any investment decisions based on this recommendation.