The Minor Leaguers (11-08-2021)

From the desk of Steve Strazza @Sstrazza

Welcome to our latest “Minor Leaguers” report.

We’ve already had some great trades come out of this small-cap-focused column since we launched it late last year and started rotating it with our flagship bottom-up scan, “Under The Hood.”

We recently decided to expand our universe to include some mid-caps…

For about a year now, we’ve focused only on Russell 2000 stocks with a market cap between $1 and $2B. That was fun, but we think it’s time we branch out a bit and allow some new stocks to find their way onto our list.

The way we’re doing this is simple…

To make the cut for our new Minor Leaguers list, a company must have a market cap between $1 and $4B. And it doesn’t have to be a Russell component–it can be any US-listed equity. With participation expanding around the globe, we want all those ADRs in our universe.

The same price and liquidity filters are applied. Then, as always, we sort by proximity to new highs in order to focus on the best players. But instead of all-time highs, we're sorting by 52-week highs these days as we don't want to discriminate against energy or other cyclical stocks.

The goal is still to catch the strongest names while they’re small and have serious upside potential. If any of these stocks ever climb the ranks to the big leagues, the returns could be huge. We’re looking at up to 10x moves just to break into large-cap land!

Let’s dive into this week’s report and see what’s happening in some of the hottest stocks in the Minor Leagues.

In recent weeks, both the mid-cap S&P 400 and the small-cap Russell 2000 have broken higher from their year-to-date ranges. After almost eight months of no progress, we think these new highs are the real deal.

Here’s a look at the current breakout in the iShares Russell 2000 $IWM:

As long as the index is above its Q1 highs around 234, this breakout is valid and the bias is to the upside. We want to be buying stocks and betting on a fresh leg higher.

When we go through a corrective phase, as we have for much of this year, it can give us valuable insight into which stocks are likely to be leaders once the selling pressure alleviates.

We've spent the past few quarters buying pockets of strength in this universe as the indexes have gone sideways. Now that the indexes are resolving higher, it's no surprise to see so many familiar names on our list. It's the same stocks outperforming today.

It's normal for the strongest stocks during a selloff to emerge as leaders when that volatility subsides.

We should also note that we had to expand the list this week because there were so many stocks at fresh highs. As we like to say, "that's information."

Here it is:

As you can see by the size of the table, we've seen some bullish breadth expansion accompany these new highs at the index level. The most since Q1, in fact.

With that as our backdrop, let’s take the field and highlight some longs we can use to express our bullish thesis on small and mid-cap stocks.

Batter up…