Deutsche Bank Says to Buy These Small Cap Stocks (SHFL, WBS, RHI, TBI, MAN, IWM)

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We have written a great deal these past few months about the signs that may be emerging to signal a true bull market. The media love to embrace their idea that we have been in a bull market since March of 2009. We may have traded in a cyclical bull market, but many feel that we have been in a secular bear market since 2000.

Sector leadership is one area we have pointed to. Another area is the emerging prominence of small cap stocks during a bull market. Typically a bull market is fed by a strong U.S. economy. Small caps thrive on a strong domestic economy. In a recent report, Deutsche Bank A.G. (NYSE: DB) highlighted some of their top small cap picks for 2013.

February’s jobs report and the ISM manufacturing numbers have set the path of least resistance for the S&P 500 upward. The Dow Jones Industrial Average has exceeded its late 2007 high, and now the S&P 500’s late 2007 high of 1565 is flashing like a homing beacon, today’s potential sell-off notwithstanding. The team at Deutsche Bank expect the S&P to exceed 1565 in the next several weeks. If price momentum does not push the index above that level in March, then April’s first-quarter earnings season should do it. This breakout may set the stage for an extended small cap rally.

Here are the small cap stocks to buy according to Deutsche Bank.

SHFL Entertainment Inc. (NASDAQ: SHFL) lives and dies with the gaming industry. They manufacture and distributes gaming devices and operate inter-casino linked systems and slot machine routes. The Deutsche Bank price target is raised from $17 to $20. The Thomson/First Call consensus price target is $18.

Serving the banking needs of customers in southern New England and Westchester county in New York, Webster Financial Corp (NYSE: WBS) makes the grade. The analysts raise their price target from $24 to $25. The Wall St. price target is right in line at $25.

Business staffing is a top small cap sector idea at Deutsche Bank. Temporary staffing companies are closely correlated to rising gross domestic product. The following are the top three names to buy on their small cap list.

Robert Half International Inc. (NYSE: RHI) provides staffing and risk consulting services in North America, South America, Europe, Asia and Australia. The Deutsche Bank price target is $45. The consensus target is $30.

TrueBlue Inc. (NYSE: TBI) was once a big target of the short selling community. Short interest in the name has dropped more than 40% since a January 31 data release. Specializing in temporary staffing for blue-collar jobs, the price target for this specialty name is $21.50. The consensus price target is $20.

Manpower Inc. (NYSE: MAN) also makes the top small cap list. It offers permanent, temporary and contract recruitment services, and the price target for this Deutsche Bank top pick is $60. The consensus target is in line at $59.50.

Since 1945, the average duration and magnitude of further gains when cyclical bulls transition into secular bulls (i.e., the market exceeds previous highs) before the next bear market was 30 months and 59%, or 18% annualized. Of the 12 secular bull markets since 1945, there were only three secular bull markets that lasted less than a year: 1972, 1980 and 2007. Compared to 2007, today’s S&P 500 PE is lower, and its EPS is more sustainable and interest rates are lower. The stage is set for a continued bull market rally, even if a short-term correction is imminent. Small caps may prove to be a solid area in which to be invested in the next move higher.

Investors looking to add a broad list of small cap stocks to their portfolio may want to consider the iShares Russell 2000 ETF (NYSEMKT: IWM). This provides a basket of small cap names to fill out and compliment large cap and international equity holdings in a portfolio.

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