Jefferies Equity Strategist Details What To Look For In Small-Cap Stocks

Investors looking outside of large-cap names for superior returns should consider small- and mid-cap stocks, but they need to do so carefully.

Steven Desanctis, an equity strategist at Jefferies, was a guest on Bloomberg TV on Friday to discuss what investors need to know about the small- and mid-cap space.

Desanctis pointed out that small-cap stocks have had a "pretty good run" and gained around 28 percent since the market's bottom. Furthermore, valuations are "pretty rich" right now at more than 18x.

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Looking forward, if the US dollar strengthens then small-cap stocks will underperform the broader market as these companies are more domestic focused.

Suggestions For Traders

"I really need to see earnings growth start to accelerate here for small-caps before I get a little more excited given where we are in valuation," Desanctis said. "I really do think the risk of the markets got to go up here given the softness in data — what we are seeing in Europe and Japan."

Interestingly, looking at the difference between the intra-day high and lows within the Russell 2000 index shows that it is at a five-year high. As such, the strategist thinks that "size and quality should outperform" from inside the small-cap market.

Desanctis recommends buying individual names within the consumer discretionary sector as the group should benefit from retail sales numbers which have been recently "really good."

Specifically, the strategist and the firm's equity analysts are recommending Urban Outfitters, Inc. URBN, given its ability to better capitalize on its brand compared to other peers.

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