Small cheap stocks are outperforming. Here's how to play them
(This story is for CNBC Pro subscribers only). Small- and mid-cap stocks have taken off in recent weeks, and Jefferies said in a new note that there are several stocks that will lead the next leg of the rally. Since a June 11 pullback, the Russell 2000 has risen 5.7% while the S & P 500 has bounced back 3.8%. Smaller stocks should continue to be a smart bet in the weeks ahead, the firm said in a note to clients. "Smaller market caps are quietly outperforming, we think this trend continues," the note said. Jefferies looked for buy-rated stocks between $1 billion and $30 billion in market cap. Those stocks had to be relatively cheap on an earnings basis, have strong return on equity and not have big increases in debt-to-equity ratios. One stock that made Jefferies' list is auto parts supplier BorgWarner . The stock, which has a market cap of about $7 billion, is still down more than 20% for the year. In January, before the pandemic sent financial markets plunging, the company announced that it was acquiring Delphi Technologies. That agreement was amended in May but is still expected to close by the end of the year. BorgWarner also priced $1.1 billion in bonds last week at 2.65%. There are several financial companies on the Jeffereis' list, as those names have underperformed the broader market just like their large cap counterparts. One of those is Synchrony Financial , which has fallen more than 33% this year. The company reported a provision for credit losses that were more than $800 million higher in the first quarter than in 2019, in part due to concerns about how the pandemic would impact the economy. Alliance Data Systems , which was recently kicked out of the S & P 500 , also made the list. The stock is by far the cheapest on an earnings basis of the 14 stocks in Jefferies' screen. The stock is down more than 50% for the year. Eastman Chemical has actually outperformed the Russell 2000 so far this year, but still would need to climb 11% to be flat for 2020. The company kept its dividend flat in the most recent quarter.

People visit the Charging Bull Statue during Covid-19 pandemic in New York. Tayfun Coskun | Anadolu Agency | Getty Images