On Monday, Tom Lee, co-founder of Fundstrat Global Advisors and head of research, boldly predicted that Russell 2000 (RUT) small-cap stocks could see up to a 40% rally by the end of the summer. Depending on political winds favoring former President Trump, small caps, industrials, and financials should see a surge.
Moreover, because small caps with shallower capital funds are more sensitive, the Federal Reserve’s interest rate cuts should bridge the gap between the S&P 500 (SPX) and Russell 2000 (RUT). Currently, SPX is ahead of RUT year-to-date at 17.5% vs 10.9% respectively.
Interestingly, according to CME’s FedWatch Tool, September has become the prime candidate for the first rate cut, of expected three by year’s end, at 98.58% probability. Last month, that chance was hovering around 70%. Goldman Sachs chief economist Jan Hatzius makes an even more optimistic case for the end of July.
“…monthly inflation is volatile and there is always a risk of a temporary reacceleration, which could make a September cut awkward to explain. Starting in July would sidestep that risk.”
Jan Hatzius in Monday’s research note
Considering that the unemployment rate rose to 4.1% in June, the highest level since November 2021, this represents the cooling of the labor market that Fed Chair Jerome Powell had repeatedly called for over the last two years. If that cooling coincides with the inflation rate getting closer to the Fed’s 2% target, the federal funds rate could go down from the present 5.25% – 5.50% range to 1.75% – 2.00% by the end of 2026, according to Morningstar’ Economic Outlook.
Duolingo
Although many have come to rely on online text translators, now boosted with AI, integrating a second language will still be in high demand. And no small cap company has cornered this market like Duolingo Inc (NASDAQ:DUOL) has.
Based in Pittsburgh, Duolingo attracted 97.6 million monthly active users (MAUs) in Q1 2024, which is a 35% year-over-year growth. Of those, 7.4 million are paid subscribers, constituting 54% YoY growth. This translated to $27 million net income compared to the $2.6 million net loss in the year-ago quarter.
In other words, Duolingo’s big bet on the freemium model paid out, as it clocked 8.6% paid subscriber penetration of total MAUs. Year-to-date, DUOL stock is down 16%, making it a good candidate for RUT catching up with SPX.
Priced at $180.22, DUOL stock is now under its 52-week average of $189.95. Per Nasdaq’s forecasting data, the average DUOL price target is $256.5 per share, with even the bottom outlook of $230 being higher than the present stock price.
Nucor Corporation
During his first term, in March 2018, President Trump imposed a 25% tariff on imported steel as one of the policies to boost domestic production and US steel manufacturers. In the likelihood of Trump’s second term, a continuation of such policies is likely to broaden Nucor’s bottom line.
Headquartered in Charlotte, Nucor Corp (NYSE:NUE) is the largest steel producer and largest scrap recycler. If the war machine needs to be fed with either Taiwan or Iran-related conflicts, Nucor’s mill tech and reliable logistics chain will be one of the main beneficiaries as well.
In Q2 earnings, Nucor reported $645 million net earnings compared to $1.46 billion in the year-ago quarter. This speaks of the cyclical nature of the company. Nonetheless, the steel producer beat Q2 EPS estimate of $2.31 at $2.68, a positive 16% surprise.
At the present price of $163.34, NUE stock is close to its 52-week average of $169.62 per share. Nasdaq’s low estimate is above it at $170, while the average NUE price target is at $188.75 per share.
Investors should also note that NUE is a dividend aristocrat stock, having increased dividend yields for consecutive 25 years. At the moment, the company gives 1.32% dividend yield at an annual payout of $2.16 per share.
UnitedHealth Group
As a healthcare insurance company, Unitedhealth Group (NYSE:UNH) relies on fees, premiums, and healthcare product sales, all of which secure steady income streams. After all, there is no foreseeable shortage for the demand of health services.
It is included in the Russell 1000 index and has a $511.97 billion market cap, but it is worth considering nonetheless. Under Trump’s second term, the privatized version of Medicare, Medicare Advantage, is likely to expand. Alongside deregulated managed care, this would likely create more revenue flows for UnitedHealth.
Last Tuesday, the insurer reported $98.9 billion in revenue for Q2 2024, a $6 billion boost from the year-ago quarter. UnitedHealth’s cash flows increased by 1.5x net income to $6.7 billion. In short, the company had another beaten earnings per share quarter, continuing its long line of exceeded expectations.
As another dividend aristocrat stock, UnitedHealth gives a 1.5% dividend yield at an annual $8.40 per share. Presently priced at $555.58, UNH stock is well above the 52-week average of $508.38 per share. And just like with Nucor, according to Nasdaq’s forecasting inputs, UNH shares’ bottom forecast of $559 exceeds the current price, while the average UNH price target is $613.42 per share.
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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.