Equity Research 19 July 2019 CORE Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 43. Restricted - Internal U.S. Small & Mid Cap Strategy Barclays Small & Mid Cap Selections Selection criteria and methodology: We attempt to bring a portfolio manager’s perspective by applying a detailed selection approach to our Barclays Equity Research Small and Mid Cap universe of 320+ stocks. We use a risk-adjusted returns framework on stocks where our analysts have high conviction and take into account factors such as liquidity, risk/reward characteristics, minimum return thresholds, recent performance, and balance sheet strength. Our selections are seeing the potential for higher levels of investment in the near future: In our twenty-fifth edition of Small & Mid Cap Selections, we are seeing a focus on impacts from the U.S.-China trade war, increasing capital expenditures, and realizing synergies through recent acquisitions. Our Small & Mid Cap Selections of 18 stocks offer a median upside to price target of 30%: The median upside case is 60% while the median downside case is -17%. Our 18 selections are Allegheny Technologies, Brandywine Realty, Cabot, Dana, HD Supply, Jones Lang LaSalle, Kennametal, Knight-Swift Transportation, Mimecast, Parsley Energy, Pilgrim’s Pride, ProPetro Holding, Ultragenyx, Spirit Airlines, SLM, Wyndham Hotels & Resorts, and Cactus Inc. Our Small & Mid Cap Selections offer the potential for superior risk-adjusted returns relative to our SMid-Cap coverage universe: These selections stack up well relative to our broader SMid-Cap coverage along multiple metrics: upside potential to price target (3.2x); risk/reward profile (2.5x); liquidity metric (1.1x); quality score (1.3x); and volatility normalized upside (2.1x). MACRO STRATEGY U.S. Small & Mid Cap Strategy Venu Krishna, CFA +1 212 526 7328 venu.krishna@barclays.com BCI, US Elias Krauklis +1 212 526 9376 elias.krauklis@barclays.com BCI, US Barclays | U.S. Small & Mid Cap Strategy 19 July 2019 2 OVERVIEW In our 25th quarterly edition (launched August 6, 2013) of Small & Mid Cap Selections, we aim to identify 15-20 attractive stocks from our SMid-Cap coverage universe of 320+ stocks (with market caps under $7 billion) by overlaying a risk-adjusted returns framework on stocks where our analysts have high conviction. In making our selections, we take into consideration factors such as liquidity, risk/reward characteristics, a minimum return threshold, recent performance, and balance sheet strength – attributes that are relevant from a portfolio manager’s perspective. Figure 1 contains a snapshot of the Barclays Small and Mid Cap coverage universe and Figure 2 shows a distribution of the Barclays Small and Mid Cap coverage universe by GICS sectors. FIGURE 1 Barclays Small and Mid Cap Equity Coverage Universe Source: Barclays Research. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight. Data as of 7/17/2019. FIGURE 2 Barclays Small and Mid Cap Coverage by Sector Source: Barclays Research. Data as of 7/17/2019. TotalOverweightEqual WeightUnderweightNumber of Stocks32011913368% of Stocks 100%37%42%21%ConsDisc12%ConsStap5%Energy17%Finan11%HlthCare16%Indust16%InfoTech11%Material3%RealEst7%Util2%Barclays | U.S. Small & Mid Cap Strategy 19 July 2019 3 Risk-Adjusted Returns Framework and Selection Rationale To arrive at our Small & Mid Cap Selections, we used a risk-adjusted returns framework outlined below. Our final stock selection comprises of stocks that fit our rules-based selection criteria that are also a part of the Barclays SMid-Cap coverage universe. Fundamental Coverage Analyst Conviction Of the Barclays equity coverage universe of 320 small and mid cap stocks, we started with a set of high conviction stocks identified by our individual analysts. These are stocks where our fundamental analysts have an Overweight rating. Currently, 37% (119 stocks) of our coverage universe has an Overweight rating. This list was then chiselled down by applying a set of rules to arrive at the final set of 18 names. Minimum Threshold for Upside Potential We filtered for stocks with an upside potential of at least 15%. This is the upside to the price target established by our coverage analysts and does not take into account the potential upside to their upside case. Attractive Risk/Reward Our analysts provide an upside and downside scenario for every stock they cover. Using this upside/downside...
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