Will the real U.S. equity market please stand up?

Thus far, 2023 has brought a mixed bag of relief rallies and disappointing corporate updates. As a result, the market has been in 'risk-on' mode, with investors shunning bleak outlooks by buying pullbacks.

There's much debate about the current rally's staying power, with most economists calling for a mild recession in the months ahead. But, for now, a much-needed 'buy the dip' mentality is a positive development after a rough 2022.

This could be good news for 'risk assets' like technology stocks, emerging markets and domestic small caps. 

After a forgettable 2022, the S&P 600 index is up more than 6% year-to-date, outpacing its large-cap counterpart. Some of January's biggest gainers are small caps — Lending Tree (+44%), Myriad Genetics (+37%) and Axcelis Technologies (+37%), to name a few.

If market sentiment stays bullish, small caps with depressed share prices and valuations could turn into big-time outperformers. So here are three small-cap names Wall Street analysts suggest keeping on the shortlist.

Is Herbalife Nutrition Stock Undervalued? 

Trading below its pandemic bottom, Herbalife Nutrition Ltd. (NYSE: HLF) is starting to look oversold. On the monthly chart, the relative strength indicator (RSI) is back below 30, which has marked turning points for lengthy recoveries in recent years. Meanwhile, the long-term Bollinger Band reading is near a historic low, suggesting a significant upside for patient investors.

The seller of weight loss products, supplements and various personal care items has faced a bunch of headwinds expected to subside this year. Commodity and freight costs are at the top of the list, and with most sales from outside the U.S., foreign exchange translation is another.

On the bright side, price increases are expected to drive more robust sales and moderate cost inflation to drive more substantial profits in 2023. 

At 6x earnings, Herbalife is arguably deep value, with the consumer staples sector trading around 24x earnings. The consensus price target implies more than 40% upside, and the last three opinions on the stock have been bullOf course, things could change significantly during next month's Q4 results and outlook. Still, Herbalife could be an excellent small-cap supplement in a long-term value portfolio. 

What Is Overstock.com's New Business Strategy?

Overstock.com, Inc. (NASDAQ: OSTK) trades at a two-and-a-half-year low and has an intriguing contrarian appeal. The former online retailer of closeout merchandise of all kinds is reinventing itself as exclusively a home furnishings brand. 

It is an attempt to cash in on a pandemic trend that has shown some staying power — consumers' willingness to spend on furniture and decor to spruce up their homes. It is also a bold move, given the supply chain issues and cost inflation that has plagued the industry over the past year, not to mention increased competition.

Yet Overstock may be an underdog worth betting on because of its past e-commerce success, name recognition and substantial customer base. In addition, the company is taking a broad swipe at the online furniture market by offering products that fit all household budgets and demographics. 

And since the pivot was announced in late October 2022, we've yet to learn about the early consumer respoNevertheless, ife. If February's quarterly update comes with some positive surprises, it could spark a reversal in the downtrodden shares.

Overstock is a high-risk investment, and waiting for signs of traction with the new strategy may be most prudent. But if it can claw back above $30 as the Street projects, early bird investors could be looking at a quick 50% return. 

Is Bread Financial a Good Digital Banking Play?

As we saw in 2021, Bread Financial Holdings, Inc. (NYSE: BFH) has the potential to rise fast. The personalized financial services provider may be staging a steadier rally since revisiting its March 2020 low. It has advanced more than 30% over the last few months. 

Bread Financial is one of several tech-driven financial companies clamoring for Americans' growing interest in a convenient one-stop solution for personal finance — credit cards, loans and savings. It is also trying to break further into the small business banking market with digital tools designed to support merchant growth. 

In December 2022, Bread Financial released a November 2022 performance update that showed its credit card and loan business jumped 24% year-over-year. Although an increased delinquency rate of 5.4% was a concern, the report revealed that cash-strapped consumers increasingly gravitate towards the Bread platform. Given the company's focus on the tech-minded younger generations, this was an encouraging sign for the longer-term opportunity.

We'll learn more about Bread Financial's latest results and forecast during this week's earnings release. The stock has momentum heading into the report, often a prelude to more gains. Based on the $53 consensus price target (and some calling for a much bigger run), investors may want to grab a slice of Bread.