Small-Cap Stocks: A Potential Bright Spot in Recessionary Times

In the US stock market, small-cap value stocks offer a strong case for investment based on their valuations. They stand out as the most attractively priced segment, notably cheaper than their large-cap counterparts. For instance, while large-cap growth stocks, including the dominant tech group known as the “Magnificent Seven,” are trading at a premium of 36% above their 20-year average price/earnings ratio, JP Morgan highlights that small-cap value stocks are trading at 14% below their 20-year average.

The Russell 2000, representing a range of smaller-cap firms, has experienced a bear market since its peak in late 2021, lagging behind the Russell 1000, which tracks larger companies, by approximately 20 percentage points.

The recent underperformance of small-cap stocks, exacerbated by factors like rising interest rates, is part of a longer trend. Since 2015, the Russell 2000 has consistently lagged behind the S&P 500, by roughly five percentage points annually, even during periods of historically low interest rates. This extended underperformance is notable, considering that small-cap stocks typically match or exceed the performance of larger-cap stocks over extended periods. For example, since 2000, the S&P 500 and the Russell 2000 have shown similar performance, and from 1926 through July 2023, small-cap value has yielded an annualized return exceeding that of larger-cap growth by more than four percentage points, as reported by The Wall Street Journal.

Historical patterns suggest that small-cap stocks might soon take the lead in the stock market, particularly if an economic downturn is on the horizon. In the 12 months following the onset of the past 11 recessions, small caps have outperformed their larger counterparts by more than 16%. Consider the dot-com crash era: between 1995 and 2000, the S&P 500 outperformed the Russell 2000 by eight percentage points annually. However, between 2001 and 2004, the S&P 500 declined by about 2%, while the Russell 2000 value surged by 80%.

Small-cap stocks also benefit from a strong dollar, typically outperforming during periods of sustained dollar strength. However, investing in the small cap segment is not without risks. Nearly half of the companies in the Russell 2000 are unprofitable, and their earnings before interest and taxes cover a smaller proportion of interest expenses compared to large-cap companies. PRISM MarketView has highlighted three small-cap stocks that we believe are priced attractively, providing a distinct perspective for investors considering this segment.

LifeMD, Inc. (LFMD)

At the beginning of November, LifeMD was highlighted as PRISM MarketView’s YTD leader in the PRISM Emerging Healthcare Index. The company still remains the YTD leader as it is up ~250% YTD. LifeMD, is a telehealth and wellness company that focuses on providing a range of health and wellness services to individuals. They offer virtual medical consultations, prescription medications, and various wellness programs, with a primary emphasis on optimizing health and well-being. The company recently reported its third quarter earnings this month, citing record revenue and adjusted EBITDA.

LifeMD is currently trading at $6.86 closer to its 52-week range high of $7.77. It has a market cap of $260M and an average 3-month trading volume of 590K shares.

Shattuck Labs, Inc. (STTK)

Shattuck Labs is advancing bi-functional fusion proteins to treat cancer and autoimmune diseases. Utilizing its proprietary ARC® platform, Shattuck designs therapies that concurrently inhibit checkpoint molecules and activate costimulatory molecules.

Most recently, the company announced its third quarter earnings that included positive interim data from its Phase 1B clinical trial of SL-172154 in PROC patients and while R&D expenses increased to due clinical trial activity, Shattuck reported $101.1M in cash and cash equivalents.

Shattuck Labs is gearing up for three pivotal updates in Q4 2023. The company completed the dose-escalation phase of the SL-172154 Phase 1A/B trial for AML and HR-MDS and anticipates full enrollment in expansion cohorts for HR-MDS and TP53 mutant AML by the end of Q4 2023. Concurrently, there’s active enrollment in the Phase 1B trial where SL-172154 is combined with liposomal doxorubicin to target PROC; completion of this enrollment and the release of preliminary data are both projected for Q4 2023. In another endeavor, the Phase 1B trial enrollment continues for SL-172154 in conjunction with mirvetuximab soravtansine for PROC, with early results also expected within the same timeframe.

Shattuck’s current share price is $2.40 which is around the mid-point of its 52-week range ($1.33 – $4.77) and has a market cap of $101.8M.

Archer Aviation Inc. (ACHR)

Archer is focused on developing electric aircraft that can take off and land vertically, enabling urban air mobility and addressing challenges associated with urban transportation congestion. Archer Aviation aims to create a sustainable and efficient mode of transportation by developing electric air taxis.

The electric aircraft leader recently inked a deal with Air Chateau, a private aviation operator in the UAE. Air Chateau International will purchase up to 100 Midnight Aircraft from Archer which is worth up to $500M. Archer intends to commence air taxi operations in Abu Dhabi and Dubai by 2026.

Archer currently is trading at a share price of $5.84. The stock boasts a 1.75Bn market cap and has been highly traded as its three month average trading volume is 6.3M shares.