RBC reveals its top small-cap stock picks

The conditions are in place for the resurgence of U.S. small-capitalization stocks to continue through the rest of the year, according to RBC Dominion Securities.

While a recovery of risk appetite has benefited stocks of all size, it has been smaller stocks that have led the market through this year's rebound.

Since markets bottomed out after a winter sell-off, the S&P SmallCap 600 index has advanced by 27 per cent, dwarfing the still-impressive 20-per-cent rally seen in the large-cap S&P 500 index over the same time.

From a technical perspective, the break-out in small caps is poised to continue, RBC analyst Robert Sluymer said in a report.

"Small-caps continue to show evidence of participating in the broader market cycle recovery with the S&P 600 index breaking out of a 12-month trading range with relative performance improving versus large and mid-cap indexes," Mr. Sluymer said.

Drilling down into sector components, the consumer discretionary sector appears to be the most attractively priced of the small-cap space.

"You only need to take a cursory look at the small-cap discretionary sector to see how compelling it looks on a relative basis," the report said.

Typically, the group trades at a small premium to the market. Currently, the average multiple on U.S. small-cap discretionary stocks is 2.4 points lower than the index.

RBC's bullish outlook is accompanied by top small-cap stock picks among the bank's analysts. Each analyst covering a distinct sector has chosen a single "high-conviction" investment idea with a minimum of 20 per cent implied upside to its target price.

The list of RBC's top small-cap stock picks is below.