Goldman Sachs is optimistic about the potential opportunities in small-cap stocks, despite the Russell 2000 posting its worst week since early January. Greg Tuorto, the manager of the Goldman Sachs Small Cap Core Equity ETF (GSC), believes that easing financial conditions could help boost this group. However, he emphasizes the need for careful selection within small caps, as the market can be volatile. Tuorto recommends looking beyond the benchmark small-cap index to identify high-quality companies, with Federal Signal Corp., SPX Technologies, and Core & Main being among the top holdings of his fund.
Tuorto points out that within the Russell 2000, there are many unprofitable companies that investors may want to avoid. However, in the $2 to $5 billion range, there are opportunities to find companies that can perform well independently. Despite the recent decline, the Russell 2000 is still up almost 2% for the year, while Goldman’s ETF has outperformed the index, rising nearly 8% in the same period. Tuorto expects small caps, particularly interest rate-sensitive sectors, to see a resurgence ahead of anticipated easing by the Federal Reserve. He believes that greater rate clarity will benefit these companies and that other financial conditions have already started to ease, providing support for small caps.
In the semiconductor industry, Tuorto sees potential for small-cap stocks to thrive, following Nvidia’s success. He highlights Cohu and Onto Innovation as his top picks in this sector, emphasizing their potential to benefit from a recovery in chip demand and high-bandwidth memory technology. Tuorto also believes that consumer-facing companies in his portfolio could continue to perform well, driven by strong consumer spending. He specifically mentions the restaurant industry, pointing to Shake Shack and Cava as examples of companies with strong management and a focus on customer loyalty and efficiency in operations.
Overall, Tuorto remains positive about the prospects for small-cap stocks, despite recent market volatility. He sees opportunities for growth in select industries, such as semiconductors and consumer-facing companies, and emphasizes the importance of careful stock selection in navigating the small-cap market. With expectations of easing financial conditions and potential rate clarity from the Federal Reserve, Tuorto believes that small caps could be poised for a rebound. Investors may want to consider his recommendations for high-quality small-cap stocks with strong growth potential in sectors like technology and consumer goods.
