Goldman Sachs sees ‘selective’ opportunities for small cap stocks

Goldman Sachs sees opportunities in small-cap stocks — even as the Russell 2000 finishes its worst week since early January.

Greg Tuorto, who runs the actively managed Goldman Sachs Small Cap Core Equity ETF (GSC), thinks easing financial conditions should help boost the group. But his view comes with a caveat.

“I do think that you have to be very selective in small caps because things can go down with great velocity,” he told CNBC’s “Fast Money” on Thursday.

The firm’s small-cap portfolio manager suggests looking under the hood of the benchmark small-cap index to identify high quality names. As of Friday, FactSet shows Federal Signal Corp., SPX Technologies and Core & Main are his fund’s top holdings.

“Within the Russell 2000, you have a lot of stuff that you probably don’t want to own,” he said. “There’s a significant amount of unprofitable companies if you look at some of the names that are not necessarily at the largest part of the benchmark. But in that $2 to $5 billion range, you can find some of the companies can make their own weather.”

Even with the losing week, the Russell 2000 is up almost 2% for the year, as of Friday’s market close. Meanwhile, Goldman’s exchange-traded fund has outperformed the index, up near 8% in the same time frame.

Tuorto contends the interest rate sensitive group is getting ready to play catch-up ahead of expected easing by the Federal Reserve.

“Other financial conditions have eased a bit, which is also helpful for small caps. And I do think that a little bit more rate clarity will be a nice tailwind for the group,” he said.

According to Tuorto, the semiconductor industry where Nvidia has dominated in 2024 could soon be a proving ground for small caps. He lists Cohu and Onto Innovation as two of his top picks in the space.

“We think [they] can benefit from a large recovery in chips and things like high-bandwidth memory, which is an analog to Nvidia’s growth,” he said. “You need that high-bandwidth memory to make those AI machines hum.”

Tuorto also thinks consumer-facing stocks in his universe could continue to outperform —citing solid consumer spending. He highlighted the strong management profile of restaurants Shake Shack and newly listed Cava.

“The consumer has chosen very broadly with their feet in terms of how they spend their money,” he said. “We like the restaurant theme a lot and Shake Shack and Cava — two companies that are really focused on not just menu, but loyalty, and they’re run by management teams that have been very, very efficient on the real estate side of things.”