Here are Bank of America's favorite small stock picks for the second half
Bank of America just named its top small cap stocks for the second half of 2021. The small cap benchmark Russell 2000 is starting to rebound after a more than 4% drop last week. Smaller names declined and larger growth stocks outperformed as the threat of higher short-term rates slowing the recovery caused investors to reassess cyclical stocks linked to the economy. However, the index has returned more than 2% this week in a sign of a comeback. Bank of America highlighted buy-rated small and midcap stocks with a market capitalization of at least $1 billion. The names also need daily liquidity of at least $20 million traded per day. The Wall Street firm's list includes some reopening and post-pandemic names, high-quality stocks and names with pricing power in an inflationary backdrop. Plus, the bank has some catalyst-driven ideas. "These represent stocks that our contributing fundamental research teams would consider their best ideas for 2021 within their [small and mid] cap coverage," Bank of America quant and equity strategist Jill Carey Hall told clients. The list has an average implied upside of 28% to the firm's 12-month price targets. Take a look at the stocks here. Bank of America said it likes Aramark and Ryman Hospitality Properties because they are more levered to reopening given their greater exposure to pent-up services demand. "Several of our 2H ideas benefit both from reopening and longer-term – from Aramark (ARMK) – which should see revenue rebuild from rising sports attendance and return to school/office, plus a focus on organic growth and a board prioritizing value creation long-term – to Ryman (RHP), a convention center lodging REIT that should benefit both from the hotel real estate recovery plus long-term tailwinds," the note said. The Wall Street firm has a $44 per share price target on Aramark and a $100 per share price target on Ryman. Bank of America also highlighted some high-quality stocks, a key theme for the bank's large and smallcap coverage for the second half. "Advance Auto Parts (AAP) is a defensive product category (auto parts) with pricing power that also benefits from reopening (driving)," according to the note. The firm also said East-West Bancorp. is likely to deliver among the best revenue growth and return on equity in the industry. Bank of America has a $223 per share price target on Advanced Auto Parts and a $100 per share target on East-West Bancorp. The firm also highlighted names that have the ability to raise prices in case inflation continues to pick up. Bank of America said food processing firm Lamb Weston and machinery company Herc Holdings have the best pricing power in the group. "Lamb Weston (LW) has potential to implement meaningful price increases to food services customers (and is also a beneficiary of independent restaurants reopening but has not re-rated to the same extent as casual diners/foodservice distributors)," the note said. Bank of America has a $100 per share price target on Lamb Weston and a $147 per share target on Herc Holdings. The Wall Street firm said it likes Colfax 's plan to separate into two publicly traded companies, which should drive valuation up. "In REITs, our team expects EPR Properties (EPR) to break out of covenant restrictions with rent collections hitting the high end of their target for 2Q, which should enable it to reinstate its dividend, redeploy capital for acquisitions and lower interest rate costs," according to the note. Bank of America also said Jazz Pharmaceutical 's underappreciated new product cycle offers a catalyst path over the next 12 months. The firm has a $53 per share price target on Colfax and $62 per share price target on EPR Properties . Bank of America sees Jazz Pharmaceuticals rallying to $228 per share in the next year. Harley Davison , L Brands and Alaska Air Group also earned spots on Bank of America's list. — with reporting from CNBC's Michael Bloom.

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