Two Stocks to Watch as Small-Caps Climb

The small-cap Russell 2000 rose just under 2% last week and easily outperformed the three major indexes. Among the Russell, biotech was one of the best performers. The SPDR S&P Biotech ETF (XBI)  up some 6%. A notable pick up in M&A activity in the back half of September has reignited enthusiasm around this high beta part equity segment.

This means, I hope, the market is starting to develop some breadth. Most of the rally since the beginning of 2023 has been led by the Magnificent Seven. Nvidia Corporation (NVDA)  is now the best performing stock in the market over the last decade and the last 20 years for that matter. The AI juggernaut now has a market cap of nearly $4.6 trillion.

To put in perspective, that is higher than the annual GDP of both France and the U.K. and right up there with Germany. Back in the tail end of the Internet Boom, Microsoft (MSFT)  was the most valuable stock with a market cap of approximately $600 billion. At the time that was roughly a third the annual GDP of France. I don’t know if this speaks to what a huge bubble the AI revolution has spawned or is a judgement on how troubled France has become as that country just saw its fifth prime minister in two years resign. Maybe it is a little of both.

I do know I am finding more value in the small-cap space than in their larger-cap brethren these days. And while I believe the entire market is quite overbought, one does have to dance while the music is still playing. On that note, I added a few shares to my stake in CTO Realty Growth, Inc. (CTO) last week. This small-cap real estate investment trust manages high-quality, retail-based properties in high growth states, primarily in the Sun Belt. CTO’s headquarters is some three hours north of me as the crow flies.  This REIT's market cap is a bit over $500 million.

Over 80% of its revenue from the states of Georgia, Texas, Florida, and North Carolina. The REIT operates well-located shopping centers in locales with far higher median income than the national average. It is in the process of repositioning several of these that previously had tenants that went bankrupt like Party City, with more stable and higher paying tenants. This should lead to higher rent growth in the years ahead. This boring little REIT has a dividend yield north of nine percent, recently added to its stock buyback authorization, and saw some small insider buying by several members of its management team in September.

I also added to my holdings in Strata Critical Medical, Inc. (SRTA). The company was known as Blade Air Mobility (BLDE) until recently. Blade sold off its air transportation business to Joby Aviation this summer to focus solely on its faster growing and more profitable organ transport business. This also bolstered the company's balance sheet.  The divesture necessitated the name change. The strategic change has seen Lake Street bump up its price target on the stock and Ladenburg Thalmann & Co. resume coverage with a bullish rating in September. I don’t think, however, most analyst firms or investors have fully factored in the positive ramifications of Strata’s business transformation yet. 

At the time of publication, Jensen was long CTO, SRTA and XBI