Small and mid-cap stocks are undervalued and offer potential gains, recommended for overweighting portfolios.

From Morningstar: 2024-07-09 05:24:00

US small-cap stocks are undervalued compared to large-cap and mid-cap counterparts, offering a 20% discount to fair value. Value stocks have the largest discount at 25%, while growth and core stocks have a 16% discount. Investors are advised to overweight small-cap stocks in their portfolios for potential gains.

Portfolio managers see opportunities in small- and mid-cap stocks globally, finding them undervalued. In Canada, the managers of Mawer New Canada A fund focus on high-quality companies mainly in the small- and mid-cap space. Neglect of smaller stocks may be due to the spotlight on Nvidia and mega-caps in the market.

AI is impacting small- and mid-cap stocks, with growing importance of their contribution. Companies like Global Unichip Corp. and eMemory are highlighted for their role in AI technology. Outside the AI narrative, Softchoice in Canada and Match Group are identified as potential growth areas for investors.

India is seen as the new emerging market for small caps, following China’s growth trajectory. Opportunities in basic manufacturing linked to India’s infrastructure drive are found in companies like Larson & Toubro and Tube Investments of India. Old-world industries like infrastructure and manufacturing are being considered amid the tech focus.

Stock-pickers like Taghiyev and Mo seek out value in various sectors beyond AI, such as Lotus Bakeries and Pathward Financial. Pathward Financial stands out as a dominant player in pre-paid cards, offering an interesting investment opportunity in the regional bank sector. Market recognition of wealth creation companies may drive long-term success.



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