BANK OF AMERICA: Buy these 26 cheap and fundamentally rock-solid stocks before the economic rebound sends them soaring in 2021

  • Bank of America strategist Jill Carey Hall says smaller and cheaper "value" stocks should continue to outperform.
  • Carey Hall and her team are highlighting 26 "Buy"-rated stocks that are inexpensive based on value metrics and should do well as the economy reopens.
  • She also advises investors to pick carefully and avoid money-losing companies because a historically large portion of smaller firms are unprofitable.
  • Visit Business Insider's homepage for more stories.

Smaller stocks are staging a furious rally, but Bank of America says they've been so neglected for so long that there are still some real bargains to be found.

"We believe the rotation into Value still has room to run for a host of reasons," wrote equity and quantitative strategist Jill Carey Hall.

Investors are getting more comfortable taking risks thanks to continued progress on the development and rollout of coronavirus vaccines and an economic stimulus package in the US, both of which could contribute to an economic recovery in 2021. These factors are only adding to the optimism around smaller companies.

Many of those trends are also true for mid-cap stocks, but Carey Hall notes that there are a couple of important differences. High-leverage small caps have struggled lately while leveraged mid caps have thrived. And while there's been a notable rally in "value" small caps, their mid-cap equivalents haven't enjoyed the same outperformance.

"While Value has generated alpha in small caps over the prior three months, there isn't a meaningful long-short spread in mid caps, suggesting even greater potential catch-up," she wrote in a note to clients.

But the broad rally brings pitfalls as well as opportunities, and Carey Hall and her team are warning investors about the distinction between promising, temporarily cheap stocks and value traps they'll regret investing in.

"We caution against Value Traps amid the recent insatiable appetite for risk assets and the best month on record for small caps," wrote Carey Hall. "The proportion of market cap in the Russell 2000 expected to be non-earners in the next 12 months is 24%, a 17-year high (28% in calendar 2020, 21% in 2021)."

So Carey Hall is focusing on low-priced stocks that will benefit from an economic recovery, are profitable, and are liquid enough that they're less likely to experience unexpected price drops.

The stocks she's come up with are all from the small-cap sectors BofA is the most bullish on: The consumer discretionary, materials, and financial spaces. They are among the cheapest 40% of stocks listed on the Russell 2000 index as measured by either their forward price to earnings, or enterprise value to sales ratios or price to book ratios.

The companies are all expected to be profitable in 2021 and report earnings growth compared to 2020, she added. The following stocks also have "Buy" ratings from the firm's analysts.

1. Urban Outfitters

Ticker: URBN

Sector: Consumer discretionary

Market cap: $2.6 billion

2020 return: -3.0%

Source: Bank of America

2. G-III Apparel Group

Ticker: GIII

Sector: Consumer discretionary

Market cap: $1.1 billion

2020 return: -31.8%

Source: Bank of America

3. Dana Holding

Ticker: DAN

Sector: Consumer discretionary

Market cap: $2.9 billion

2020 return: +10.1%

Source: Bank of America

4. Cracker Barrel Old Country Store

Ticker: CBRL

Sector: Consumer discretionary

Market cap: $3.2 billion

2020 return: -12.1%

Source: Bank of America

5. KB Home

Ticker: KBH

Sector: Consumer discretionary

Market cap: $3.1 billion

2020 return: +3.9%

Source: Bank of America

6. Kontoor Brands

Ticker: KTB

Sector: Consumer discretionary

Market cap: $2.4 billion

2020 return: 0.0%

Source: Bank of America

7. MDC Holdings

Ticker: MDC

Sector: Consumer discretionary

Market cap: $3.2 billion

2020 return: +34.2%

Source: Bank of America

8. Sonos

Ticker: SONO

Sector: Consumer discretionary

Market cap: $2.6 billion

2020 return: +51.9%

Source: Bank of America

9. MTH Homes

Ticker: MTH

Sector: Consumer discretionary

Market cap: $3.2 billion

2020 return: +44.4%

Source: Bank of America

10. Sonic Automotive

Ticker: SAH

Sector: Consumer discretionary

Market cap: $1.7 billion

2020 return: +32.3%

Source: Bank of America

11. Asbury Automotive Group

Ticker: ABG

Sector: Consumer discretionary

Market cap: $2.8 billion

2020 return: +32.1%

Source: Bank of America

12. Group 1 Automotive

Ticker: GPI

Sector: Consumer discretionary

Market cap: $2.2 billion

2020 return: +25.1%

Source: Bank of America

13. Helen of Troy

Ticker: HELE

Sector: Consumer discretionary

Market cap: $5.6 billion

2020 return: +23.7%

Source: Bank of America

14. American Axle & Manufacturing Holdings

Ticker: AXL

Sector: Consumer discretionary

Market cap: $919 million

2020 return: -27.7%

Source: Bank of America

15. Bed Bath & Beyond

Ticker: BBBY

Sector: Consumer discretionary

Market cap: $2.5 billion

2020 return: +14.5%

Source: Bank of America

16. First Bancorp

Ticker: FBP

Sector: Financials

Market cap: $1.9 billion

2020 return: -15.8%

Source: Bank of America

17. Radian Group

Ticker: RDN

Sector: Financials

Market cap: $3.9 billion

2020 return: -19%

Source: Bank of America

18. Virtus Investment Partners

Ticker: VRTS

Sector: Financials

Market cap: $1.6 billion

2020 return: +76.5%

Source: Bank of America

19. BankUnited

Ticker: BKU

Sector: Financials

Market cap: $3.2 billion

2020 return: -7.3%

Source: Bank of America

20. Essent Group

Ticker: ESNT

Sector: Financials

Market cap: $5.2 billion

2020 return: -14.2%

Source: Bank of America

21. Artisan Partners Asset Management

Ticker: APAM

Sector: Financials

Market cap: $3.1 billion

2020 return: +54.1%

Source: Bank of America

22. Focus Financial Partners

Ticker: FOCS

Sector: Financials

Market cap: $2.3 billion

2020 return: +56.1%

Source: Bank of America

23. Hancock Whitney

Ticker: HWC

Sector: Financials

Market cap: $2.8 billion

2020 return: -25.2%

Source: Bank of America

24. Alcoa

Ticker: AA

Sector: Materials

Market cap: $4.0 billion

2020 return: +3.1%

Source: Bank of America

25. Forterra

Ticker: FRTA

Sector: Materials

Market cap: $1.2 billion

2020 return: +59.9%

Source: Bank of America

26. O-I Glass

Ticker: OI

Sector: Materials

Market cap: $1.9 billion

2020 return: -1.7%

Source: Bank of America

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