Despite the recent volatility, all the major indexes remain up about 20% or more for 2021, which means if you didn’t make money this year, you were either all in cash or very unfortunate. That may be ready to change in 2022. While there are a variety of reasons, investors need to start thinking now about their plan of action. There is still plenty of time to rearrange portfolios, do some tax-loss selling and make other changes. The route to take in 2022, according to one top Wall Street pundit, may be surprising.
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Jill Carey Hall, the superb equity and quantitative strategist at BofA Securities, makes the case that the S&P 500 will end 2022 at the 4,600 level, which is only about 2% higher than current levels. Hall compares the current situation to how the market traded in 2000. If that’s indeed the case, then it may be time to look at small-capitalization stocks. She noted this in a recent research report:

Despite our forecast for a flat year for the S&P 500, we are still bullish on pockets of the market, including small caps. Small caps are more domestic, more exposed to the services spending recovery, bigger beneficiaries of capex/reshoring and are inexpensive versus large caps. But COVID is the key risk: small vs. large cap returns have been highly correlated with cases. While we assume improvement – and so far our biopharma group doesn’t expect a major impact from Omicron on the pandemic’s trajectory – any significant resurgence could suggest more caution.

Hall lists five specific reasons small caps make sense for 2022:

1) More pricing power (more mentions on earnings calls vs. large caps, and margins less negatively correlated with labor costs and CPI than large caps)

2) Commodity inflation benefits small caps (and capex)

3) Small caps led during several historical analog periods (late 60s, late 70s/early 80s)

4) Hedge against stagflation (small beat large)

5) Small caps better discount inflation (pricing in 4% CPI; large caps pricing in 1% CPI).

A major point from the report is for investors to stick with quality companies. The buy-the-dip risk-on crowd probably has taken a beating lately and won’t be the volume and breadth support they have been over the past two years.

We screened our 24/7 Wall St. small-cap coverage universe looking for Buy-rated companies that pay solid and reliable dividends. We found five that look like great ideas for investors wary of a year 2000-like repeat. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

This is a triple net lease real estate investment trust (REIT) that is a solid addition to conservative portfolios. Essential Properties Realty Trust Inc. (NYSE: EPRT) is an internally managed real estate company that acquires, owns and manages primarily single-tenant properties that are net leased on a long-term basis to companies operating service-oriented or experience-based businesses.
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As of December 31, 2020, the company had a portfolio of 1,181 properties. Essential Properties qualifies as a REIT for federal income tax purposes. It generally would not be subject to federal corporate income taxes if it distributes at least 90% of its taxable income to its stockholders.

Shareholders receive a 3.65% dividend. BofA Securities has a $34 price target for the shares, and the consensus target is $33.73. The final trade for Friday came in at $27.39.

South Jersey Industries

While hardly a household name, this top company pays among the highest dividends of any utility we cover. South Jersey Industries Inc. (NYSE: SJI) engages in the provision of energy-related products and services.

Its SJG Utility Operations segment consists of natural gas distribution to residential, commercial and industrial customers in southern New Jersey. The ETG Utility Operations segment consists of natural gas distribution to residential, commercial and industrial customers in northern and central New Jersey.

The ELK Utility Operations segment consists of natural gas distribution to residential, commercial and industrial customers in Maryland. The Wholesale Energy Operations segment includes the activities of South Jersey Resources Group and South Jersey Exploration. The Retail Electric Operations segment consists of electricity acquisition and transportation to commercial, industrial and residential customers.

Investors receive a 5.19% dividend, and the stock will go ex-dividend this week, so investors that buy shares prior to that will collect the dividend. The BofA Securities price target is $25, lower than the consensus target of $28.30. The shares closed at $23.90 on Friday.

Sturm Ruger

Gun owners are very familiar with this top company that pays a stellar dividend. Sturm, Ruger & Co. Inc. (NYSE: RGR) engages in the design, manufacture and sale of firearms to domestic customers.
The Sturm Ruger Firearms segment manufactures and sells rifles, pistols and revolvers principally to a number of federally licensed, independent wholesale distributors primarily located in the United States. The Castings segment manufactures and sells steel investment castings and metal injection molding parts. The company was founded by William B. Ruger in 1949 and is headquartered in Southport, Connecticut.
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While the dividend can vary because the payout is based on earnings, given the company’s strong upside, it is worth taking despite some slowing demand.

Sturm Ruger stock investors receive a 5.21% dividend. The $98 Lake Street Capital price target is well above the $84.00 consensus target. Friday’s closing print was $64.51.

Suncoke Energy

The off-the-radar energy play is a good way to play the steel infrastructure angle. Suncoke Energy, Inc. (NYSE: SXC) operates as an independent producer of coke in the Americas and Brazil.

The company offers metallurgical and thermal coal. The company also provides handling and/or mixing services to steel, coke, electric utility, coal producing, and other manufacturing-based customers. In addition, it owns and operates five cokemaking facilities in the United States and one in Brazil.

Recently reported quarterly earnings easily exceeded the consensus forecast and compare with a net loss a year ago. The huge positive surprise followed an even larger one in the prior quarter.

Investors receive a 3.83% dividend. B. Riley Securities has set a $10 price target on Suncoke Energy stock. The consensus target is $9.50, and Friday’s final trade was reported at $6.30 a share.

Tanger Factory Outlet

Bargain shoppers looking for the top goods at a discount price are big fans of this company, and after a horrible pandemic-related slowdown, it looks to be hitting on all cylinders again. Tanger Factory Outlet Centers Inc. (NYSE: SKT) is a leading operator of open-air upscale outlet shopping centers that owns or has an ownership interest in a portfolio of 38 centers.

Tanger’s operating properties are located in 20 states and in Canada, totaling approximately 14.1 million square feet, leased to over 2,700 stores operated by more than 500 different brand name companies. The company has more than 39 years of experience in the outlet industry and is a publicly traded REIT.

Investors receive a 3.68% dividend. Compass Point upgraded the shares last month and has a $23 price target. The consensus target is $20.00, and the stock closed most recently at $19.84.

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With the potential in 2022 for continued inflation, rising interest rates and a host of additional issues, migrating some assets to the small-cap world now makes a ton of sense.

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