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The correction in small caps is actually a buying opportunity

Here are 20 stocks to consider from a bullish research note

While there’s plenty of wariness today around small-cap stocks, some contrarians see buying opportunities.

Analysts at Janney Capital Markets are pointing out their top ideas for the next six to 12 months in the beaten-up realm of small caps.

Small caps’ underperformance versus large caps is getting extreme, and the little guys are gearing up for outperformance, argues a Janney note dated Tuesday. This outperformance could happen as the stock market slips further in mid-October or late-October, but then a bottom will be established, the note says.

“Given our firm’s continuing emphasis and focus on small cap stocks, this is an opportunity to proactively highlight our highest conviction ideas to clients who are looking to take advantage of the recent pull back,” writes Andrew Maddaloni, Janney’s director of equity research.

The table at the bottom of this article gives Janney’s top small-cap picks — 20 stocks in all.

The warnings on small caps have come from the likes of Charlie Bilello of Pension Partners, as noted in Wednesday’s Need To Know column, as well as from Michael Batnick of Ritholtz Wealth Management, who points out in a Yahoo Finance post that sellers are in control. Batnick notes the iShares Russell 2000 ETF’s IWM, +1.92% 200-day moving average has just turned downward for the first time since November 2012.

Many investors have indicated they’re not ready to become more upbeat on the small fry. Citi Private Bank’s Steven Wieting said his shop has been overweighting large-cap stocks this year and neutral on small caps given their lofty valuations.

What would it take for him to get more interested in small caps? “Enough of a correction,” he told MarketWatch. “I’m not sure we’re there.”

But Citi Private Bank sounds upbeat in general on the U.S. stock market, saying the upcoming third-quarter earnings season could help provide stability. “What I’m looking for very near term are that American earnings are going to beat estimates by 3 or 4 percentage points,” Wieting said.

And now without further ado, check out Janney’s picks below.

Janney’s top picks among small-cap stocks
Small-cap company’s nameTickerKey quote from Janney note
Atlas HoldingAFH“niche commercial auto insurer with great growth opportunity”
Agile TherapeuticsAGRX“targeting an unmet need for a patch contraceptive option”
The AndersonsANDE“an integrated grain merchandising operation”
Abercrombie & FitchANF“an attractive 12-month risk/reward opportunity”
ARC Group WorldwideARCW“present in each phase of the manufacturing process from design and prototyping to production”
DemandwareDWRE“direct to consumer efforts by retailers/brands will continue to drive strong eCommerce spending”
Encore Capital GroupECPG“an underappreciated leader in the debt recovery sector”
Finish LineFINL“branded Macy’s shops appear to be catalyzing the core”
Five BelowFIVE“a unique retail concept”
Flexion TherapeuticsFLXN“halt [for key treatment] will be short-lived”
Harvard BioscienceHBIO“continues to transform under its new management team”
Horace Mann EducatorsHMN“the largest national multiline insurance company focusing on educators’ financial needs”
Krispy Kreme DoughnutsKKD“attractive long-term unit growth opportunities, solid long-term margin-expansion opportunities”
Mellanox TechnologiesMLNX“expanding further into new customer segments, including storage and Cloud”
Mueller Water ProductsMWA“our top small-cap idea in the water infrastructure space”
Physicians Realty TrustDOC“one of the best ways to take advantage of the expanding health-care market”
Regal EntertainmentRGC“a trade into the strength [of] the 2015 film slate”
RepligenRGEN“primed to benefit as targeted biotherapeutics become more ubiquitous”
State Auto FinancialSTFC“an inexpensive ‘option’ on a value enhancing business combination [i.e. buyout]”
VirtusaVRTU“Virtusa’s advantage is providing value to clients through IT simplification/rationalization”

Source: Janney Capital Markets Research