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Bank of America says that relatively volatile "high-beta" small-caps usually do well in January.
One of its top strategists is telling investors about some of the firm's top picks for the month.
The bank is also positive on value stocks and high free cash flow generation.
After a difficult 2022, most investors are really hoping that the new year comes with a new investing environment.
While it's not always that simple, there are some seasonal patterns that emerge over time. Bank of America strategist Jill Carey Hall says that among smaller companies, taking a bet on more volatile stocks usually works out in January.
"Risk factors have tended to outperform within small caps in January, where 5yr beta has been one of the most consistent factors (outperforming the equal-weighted Russell 2000 in 60% of Januarys since 1989 by an average of 2.3ppt)," she wrote in a recent note.
That's somewhat different from what's worked in 2022. Hall points out that in the small-cap field, eschewing risk and taking a value approach by selling stocks that look expensive in terms of metrics and buying ones that look cheap has been the best way to outperform this year.
The bank encourages investors to prioritize criteria like high free cash flow generation and improving profit margins as a path to success. And like many Wall Street firms, it's telling investors to invest in dividend-producing stocks as a way to shore up their returns and counteract the effects of inflation.
BofA is bullish on value stocks, and adds that focusing on quality metrics, momentum investing, and highly liquid stocks are generally successful investing methods during the late stages of an economic expansion like the one we're experiencing today. The bank expects this period to last for at least a few months before a recession sets in.
But when it comes to January, BofA views the 21 stocks below as some of the best opportunities available. The list is made up of stocks with "Buy" ratings from Bank of America's analysts, and all of these companies have underperformed the small-cap benchmark Russell 2000 in 2022. That index itself has had a rough year, as it's declined 21.5% in year-to-date.
A high-beta approach comes with risks, as by definition the stocks are more volatile than average. A stock with a beta of 1.5 has been 50% more volatile than the broader market over the past five years, and a stock with a beta of 2 is twice as volatile. BofA's focus on "Buy"-rated companies is intended in part to reduce that potential downside.
These 21 stocks are ranked based on how far they've fallen in 2023.
