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Morgan Stanley likes these small caps to outperform in this tough market


The best way to invest in this market may be to go small, according to Morgan Stanley. The firm said in a note Thursday that it sees small-cap stocks outperforming their large-cap counterparts going forward. Strategist Michelle Weaver said small caps have seen their earnings multiples fall sharply when compared to large-cap stocks, adding that the earnings revision breadth for smaller names seems to have bottomed. “Our base case remains that the recent strength in equities will prove to be another bear market rally in the end,” she said. “We see maximum upside for the S & P 500 near 4250-4300, but we believe that small caps are likely to rally more on a percentage basis — as is typical during such rallies, when more heavily shorted areas tend to do the best.” The firm also highlighted stocks from its North America coverage universe that are rated overweight and have market caps between $500 million and $10 billion. Here are 10 of them: Semiconductor firm Ambarella has about 37% upside from where the stock price closed on Friday. The analyst covering it said that, although much of the company’s revenue now comes from video processing and surveillance, it has a big growth opportunity around automotive and mobile robotic AI that helps support the company’s high multiple. Elsewhere in the tech sector, analyst Lauren Schenk noted that luxury retail marketplace Farfetch ‘s shares are trading at historical lows on an enterprise value-to-revenue multiple basis. Her $30 price target on the stock is 238% above Friday’s closing price. The athletic apparel and shoe maker On Holding is one of the firm’s retail picks. The analysts cited its “attractive business model, improving financial profile, and room for both positive EPS revisions and multiple re-rating in 2022 and beyond” as support for their rating. The stock is down roughly 42% for the year. In other sectors, Morgan Stanley also likes Alaska Air , Huntsman Corp. , Lamar Advertising , Liberty Energy Services , Natera , Planet Fitness and Signature Bank . Weaver reiterated that their call on small caps “is a relative call and that we expect absolute downside for small caps over our forecast horizon.”

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