13 Small-Cap Stocks That Could Shine

The Guggenheim Solar ETF (TAN) has rallied with solar stocks lately

by Andrea Kramer

Published on Jul 26, 2017 at 2:30 PM

The Russell 2000 Index (RUT) has ascended to record highs recently. However, as Schaeffer's Senior Equity Analyst Joe Bell, CMT, pointed out earlier this week, the RUT had to work hard for its new highs, barreling past notable resistance. As such, the small-cap index is "not quite as overbought" as the broader S&P 500 Index (SPX) and Nasdaq Composite (COMP), so "the small-cap sector taking a leadership role would not be out of the question going forward."

Against this backdrop, we decided to scout Wall Street for a few small-cap stocks with upside potential, from an Expectational Analysis point of view, and solar stocks Canadian Solar Inc. (NASDAQ:CSIQ), SunPower Corporation (NASDAQ:SPWR), and JinkoSolar Holding Co., Ltd. (NYSE:JKS) made the list. 

13 Small-Cap Stocks for Contrarian Bulls

To populate our list of small-cap stocks -- which we defined as stocks with a market cap of under $2 billion -- Schaeffer's Senior Quantitative Analyst Rocky White looked for stocks that met the following criteria: trade at least a million shares a day; trade above $7; have rallied at least 6.9% in 2017 (the same as the RUT); have at least 10% of float dedicated to short interest; and sport less than 50% "buy" ratings from analysts. Below are the stocks that made the cut, sorted by year-to-date return.

small cap stocks

Solar Stocks Defy Seasonal Headwinds

Since breaking north of resistance in the $14 area in mid-June, thanks to President Donald Trump's talk of a "solar wall," Canadian Solar stock has been on fire, peaking at an annual high of $18.12 just last week. It's been a similar story for SunPower stock, which notched a year-to-date high of $11.65 last week, and has more than doubled from its four-year lows of $5.84 in March. JinkoSolar has been even more exceptional, boasting a year-to-date gain of more than 72%, and scoring an annual high of $28.26 yesterday, thanks to a noteworthy supply agreement.

Against this backdrop, the Guggenheim Solar ETF (TAN) has barreled more than 25% higher since its April lows in the $17 region, and nabbed a year-to-date high north of $21.50 last week. In fact, the exchange-traded fund (ETF) is defying seasonal headwinds, as TAN tends to be the worst ETF to own in July, the third quarter, and the second half of the year.

Skepticism Surrounds the Solar Sector

Amid TAN's unseasonable rally, the solar sector has emerged at the top of our internal Sector Scorecard, which identifies industries with outperforming stocks surrounded by pessimism. More than three-quarters of the stocks under our "energy other" umbrella are above their 80-day moving averages, yet just 40% of analysts offer up "buy" ratings -- down from 71% a year ago. That story is reflected in CSIQ, SPWR, and JKS, which have very few -- if any -- "buy" endorsements.

In addition, the median short-interest ratio (SIR) is over seven days to cover for solar stocks, and short interest has jumped an average of 37.8% over the past year. As per the table above, it would take Canadian Solar shorts about four days to cover their bearish bets, at CSIQ stock's average pace of trading. The SIR is even higher for SPWR and JKS, at nearly five days and six days, respectively.

Should the small-cap solar stocks continue to defy skeptics -- and seasonality -- a round of upgrades could lure more buyers to the table. Likewise, there's plenty of sideline cash in the form of short sellers to drive the stocks higher, should these bears hit the bricks.
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