Health care services is the final industry of the top eight, as covered in “Sector strategies for navigating 2023.” The underlying theme of the opportunities discussed throughout the top sector choices is the relative attractiveness of the small to mid-cap stock universe in the US. There are two factors underlying this reality.
First, the sheer number of opportunities in the small to mid-cap segment far exceeds what is available in the large to mega caps. There are simply more opportunities from which to choose. For example, expanding the opportunity set to the S&P 1500 Total Market Index triples the number of opportunities compared to the S&P 500 Index. Viewing the companies by industry rather sector doubles the number of opportunity vectors from 11 to 21.
The second factor at play is the large number of small to mid-cap companies which trade at discounted valuations, while offering attractive growth potential. For example, the forward PE multiple of the top eight industry choices for 2023 is 12x and the estimated earnings growth rate is 13.5%.
An 8.3% earnings yield projected to grow in the mid-teens annually over the next three to five years is relatively attractive today. The relative attractiveness is clear when viewed against the following market backdrop.
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