Stocks with smaller market capitalizations are set to reap the benefits from the start of the Federal Reserve’s latest rate-cutting campaign. The U.S. central bank reduced interest rates by an oversized half-percentage point on Wednesday, pushing stocks higher. The S & P 500 ended the week with a 1.4% increase, clawing back its losses from earlier in September. The Dow Jones Industrial Average and Nasdaq Composite added 1.6% and 1.5%, respectively, this past week. While a lower-rate environment can benefit the entire economy, small-cap stocks especially excel since many companies hold floating-rate debt and are thereby more reliant on bank loans. Lower interest rates make it cheaper for businesses to refinance that debt, helping to boost their profits. Such optimism towards small-cap stocks was noticeable in the market, with investors driving up the Russell 2000 by 2.1% in the last week. With this in mind, CNBC screened for stocks with smaller capitalizations that could outperform in the future. We wanted to find smaller stocks that have a lot of debt, so they would benefit the most from some rate relief. The shares also need to be liked on Wall Street. For inclusion in the search, stocks had to meet the following specific criteria: A member of the S & P MidCap 400 index or the S & P SmallCap 600 index Buy ratings from at least 60% of analysts covering the company Upside to consensus price targets of at least 30% High debt load: Total debt at least 70% of equity Biotechnology stock Sarepta Therapeutics has gained 32% this year. Four out of five analysts covering the Cambridge, Mass-based company rate it a buy, and the stock has a potential 52.5% upside to the consensus price target. Sarepta’s total debt is more than one-and-a-half times bigger than its total equity. Last month, Evercore ISI upgraded Sarepta to outperform from in line. Analyst Gavin Clark-Gartner wrote that he was taking advantage of recent weakness in the stock and, as an additional catalyst, cited a good entry point for Sarepta’s launch of Elevidys, a gene therapy used to treat Duchenne muscular dystrophy. “With expectations reset and a clear understanding that the Elevidys ramp isn’t coming through until into 2025 (and beyond), we believe the SRPT stock setup is now good to own for the launch with room for upside execution,” the analyst wrote. Clark-Gartner’s $179 price target is approximately 41% higher than where shares of Sarepta closed on Friday. Analysts are similarly optimistic on energy producer Civitas Resources , despite its stock slipping 21% in 2024. The average analyst still sees upside of more than 52%, while nearly all analysts (94%) covering the stock are bullish. Civitas’ total debt recently stood at about 79% of total equity. On Wednesday, JPMorgan analyst Zach Parham initiated research coverage of Civitas with an overweight rating, and set a $67 price target, implying that the stock could rise 23% from Friday’s close. Parham noted that Civitas currently sells at a discount to peers. “In our view, the current valuation discount is too punitive, particularly in light of the recent changes that CIVI made to its cash return program to more heavily focus on share buybacks, which should help move valuation higher,” Parham wrote. Another stock that cropped up on our screen was Chart Industries , which manufactures engineering equipment for the energy industry. The company has fallen 10% this year, but analysts still see an average 49% upside for the stock. Meanwhile, 74% of analysts covering Chart rate it a buy. Chart’s total debt currently eclipses its total equity by 1.4 times. Morgan Stanley upgraded Chart Industries to an overweight rating early last week. “GTLS’s core portfolio is comprised of natural gas, energy transition and renewables applications, where our outlook remains constructive,” wrote analyst Devin McDermott. “GTLS now screens more attractively on our relative revisions, valuation and risk-reward outlook vs. our coverage.” McDermott’s $175 price target sees shares climbing 43% from their Friday close.
