Russell 2000 Surge Post-Election: How to Play the Small-Cap Pop

Key Points

• As the presidential election results come in, market reactions leave investors wondering where the next best step may come from.
• There are reasons to believe that the small-cap rally will continue, but not all small businesses will perform the same.
• Three names give investors additional upside and stability moving forward into the post-election market.

The presidential election for the United States, probably one of the most awaited events and catalysts in the stock market for the year, is now over and Donald Trump is the President-Elect. The market and different participants have now taken on their views as a conclusion from the results, and it looks like most cyclical names will be in play for investors to consider.

Not only are these cyclical names made up of consumer discretionary stocks, but a particular mix is to be considered in the small-cap niche of the market. As the market opens for the first day of post-election results, investors see the iShares Russell 2000 ETF NYSEARCA: IWM and its 5% rally as a sign of confidence from the group. On a relative basis, small caps seem to be one of the best places to be.

However, it’s not all sunshine and rainbows, as the iShares 20+ Year Treasury Bond ETF NASDAQ: TLT keeps selling off to push higher bond yields. These yields act like gravity on small-cap stocks; the higher they are, the harder they make it for smaller companies to take off. However, the ETF holds a few exceptions, like Sprouts Farmers Market Inc. NASDAQ: SFM, Mueller Industries Inc. NYSE: MLI, and even HealthEquity Inc. NASDAQ: HQY.

Why Small-Cap Stocks Are Rallying Post-Election—and Key Risks to Watch Out For

Markets consider a Trump victory to be bullish for the economy, and small businesses are the ones to lead the way into whatever expansion the economy may have moving forward. Relative to the S&P 500 and its 2% rally, the small-cap ETF is giving investors something to consider as it rallies by more than double.

Despite the initial bullish reaction, investors need to consider rising bond yields as a fair warning. Higher yields will raise the cost of capital and financing, making it harder for most small-cap companies to expand and maintain a high-margin operation.

This is why investors should pay attention to today’s list. While not immune to the trend, these stocks do have a few tailwinds that can help them maintain a bullish outlook in the coming months.

Why Rising Yields Won't Shake Sprouts Farmers Market Stock

Whether the economy is booming or busting, whether yields are high or low, Sprouts Farmers Market has the benefit of being a consumer staples stock. This stability is reflected through the company’s relatively low beta of 0.56 to offer investors the technical safety they need while markets make up their minds.

Then, there’s the take from Wall Street analysts, particularly those at Goldman Sachs. To start November 2024, these analysts reiterated their “Buy” rating on Sprouts Farmers Market stock, this time boosting their valuations to a high of $157 a share from a previous $127.

To prove these new targets right, the stock would need to rally by as much as 14% from where it has already rallied to post-election. That is one way to ride the small-cap rally without risking the potential ceiling these higher yields are threatening to place.

How a Metal Supercycle Could Drive Mueller Industries Stock Higher

The market’s reaction to the election also suggests a new commodity super cycle, born of the increased business activity that would come globally. This is where Mueller Industries, a copper and aluminum producer, comes into play.

Shares of Tesla Inc. NASDAQ: TSLA are up by 12% in a single day to reflect the expected demand for electric vehicles as an election tailwind. Mueller Industries will benefit as copper is an essential material for battery-making. Knowing this, Wall Street analysts have much work to do as new price targets and ratings need to be made.

The stock is already up by 10% to open with bullish post-election sentiment, and the fact that it is now trading at a new 52-week high gives investors a glimpse into the future momentum that could be had in this name.

Why HealthEquity Stock Gains Institutional Support for Post-Election Growth

Over the past 12 months, HealthEquity stock has attracted up to $1 billion in institutional capital, no small achievement for a small-cap stock with a market capitalization of only $8.6 billion.

This bullish sentiment among investors could be credited to the company’s financials, which, as any technology company, sponsor a gross profit margin of up to 64.9%. These high margins allow the company to navigate a rising yield environment with relative ease, and investors need to keep that front and center.

Markets are the bullish for HealthEquity stock compared to its peers, as judged by its willingness to pay a price-to-earnings (P/E) ratio of up to 81.4x compared to the business services’ average valuation of 19.5x P/E. Stocks that are thought to grow at higher rates typically command a premium, and HealthEquity stock is no exception.