We’ve had some great trades come out of this small-cap-focused column since we launched it back in 2020 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 the first year or so, we focused only on Russell 2000 stocks with a market cap between $1 and $2B. That was fun, but we wanted to branch out a bit and allow some new stocks to find their way onto our list.
The way we did 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 November, small and mid-cap stocks briefly resolved higher from their year-to-date consolidation patterns. These new highs quickly failed, as both the Russell 2000 and S&P Mid-Cap 400 retreated right back into their old ranges.
Fast-forward to today, and small-caps have taken out the 2021 lows and resolved lower from this rectangle formation. Here’s a look at the Russell 2000 $IWM:
The bias is to the downside at the index level until last year's lows are reclaimed. We should expect further weakness in this environment and will be best served to pick our spots selectively and not force longs.
With that said, we want to pay extra close attention to those names exhibiting relative strength through the recent volatility. It’s normal for the strongest stocks during periods of weakness to emerge as leaders when the selling pressure subsides.
We want to identify those names now and be prepared for it. In recent weeks and months, those leaders have been financials and oil & gas stocks. These groups have dominated our list and this week is no different.
Let's take a look:
Since we sort our list by proximity to 52-week highs, the names toward the top are potential future leaders. They’re not just exhibiting impressive relative strength. They’re also making new highs on an absolute basis.
With that as our backdrop, let’s take the field and highlight this week’s top players!
Batter up…
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