Bank of America analysts have revealed a list of small and mid-cap stocks where they see near- or long-term upside potential that may not be appreciated or well-understood by investors.
The 14 US-listed stocks included are all undergoing significant business transformations and all offer around a 50% implied upside potential to Bank of America’s price objectives (PO).
“Small and mid-caps are transforming,” analysts wrote. “Even at the index level, we’ve seen shifts – from greater free cash flow/cash return (40% pay dividends today vs. a third a decade ago) to more focus on innovation (R&D/sales 6% today vs. 2% a decade ago) and other shifts.”
Companies highlighted by BofA as undergoing business mixes through M&A include telecom stock Cogent Communications (PO $85), software stock Aspen Technology (PO $225) and entertainment firm Endeavor (PO $32).
Of the many companies that are simplifying their businesses through divestitures, Bof A named MDU Resources Group (PO $23) and tech stock Jabil (PO $126) as ones to watch.
With AI a hot topic, BofA thinks that healthcare stock R1 RCM (PO $23.50) and biotech stock Exiscientia (PO $16) both have opportunities for margin expansion.
And amongst the companies undergoing strategy shifts, retailer Bath & Body Works (PO $50) and private mortgage insurance stock Essent (PO $59) are on the right track, according to BofA.
These stocks “may be particularly compelling amid an uncertain macro backdrop,” analysts noted.
Other “transformational” small caps mentioned are Bloom Energy Corporation (NYSE:BE) (PO $26), BorgWarner (NYSE:BWA) (PO $67), Blue Owl Capital (PO $17), Southwestern Energy Company (PO $14) and Sun Communities (PO $148).