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5 Investment Ideas From Wall Street: Jan. 20

Stocks in this article: MSFT TNK FRO

3.) Small-cap stocks will continue their rally even as earnings growth slows.

JP Morgan tells investors to ignore the chorus of concerns that the consensus for growth in small-caps is too aggressive. "We believe small-caps should easily beat fourth quarter earnings during this reporting season which should be a catalyst for small-cap equities at least until the end of February," writes the firm in a recent report.

Small caps will likely growth 20% in terms of earnings per share in 2012, according to JP Morgan, which basis its estimate on gross domestic product growth ranging from 2.5% to 3%.

While the firm thinks that the consensus earnings growth for the Russell 2000 index, currently at 34% for 2012, is too high and will be downwardly revised, it doesn't think stock prices on the index will take a hit. "We see a more meaningful performance differential at the individual stock level driven by earnings momentum and revisions," explains the firm.

And what should investors watch out for? Avoid names that rank poorly when the full earnings estimates for the index are revised down. Key stocks to avoid might be the bottom decile, which JP Morgan says yielded a negative 33% return in 2011 and significantly underperformed the market.

The firm calculates that if you had invested $100 in the top decile stocks of the index 17 years ago, you would have come out with more than $1,600 by 2011. For contrast, the same initial investment in the bottom ten stocks would have yielded a flat return.

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