Fourth quarter projections have the Russell 2000 (INDEXRUSSELL:RUT) staying flat with no annual growth this quarter, the Russell Mid-Cap (INDEXRUSSELL:RMCC) hitting 5% growth, and the Russell 2500 (INDEXRUSSELL:R25I) edging up with 2% growth, but those projections could be a conservative reaction to mixed news, leaving plenty of room for positive surprise.

RUT positive guidance 0114 Mid-Cap Indices

RMC positive guidance 0114 Mid-Cap Indices

Small and Mid-Cap indices growth

“Q3 actuals ended up higher than projected in that quarter’s preview. At the same time, Q4’s earnings growth is below that projected headed into Q3 results,” writes Citi analyst Scott T. Chronert. “Analysts responded to solid positive surprise trends for Q3 by holding full-year expectations. But, we also suspect that a mixed holiday season and weather issues have influenced estimates. We view current expectations as setting up for solid positive surprise trends.”

The 2014 consensus projections are for the Russell 2000 (INDEXRUSSELL:RUT) to grow 17%, the Russell Mid-Cap (INDEXRUSSELL:RMCC) to grow by 10%, and the R2500 by 15%.  “As is typical, growth is back-half loaded,” writes Chronert. “We view Russell 2000 and Russell 2500 (INDEXRUSSELL:R25I) projections as somewhat aggressive, with Russell Mid-Cap closer to being right-sized.”

Watch out for earnings skew

But just knowing that the Russell 2000 (INDEXRUSSELL:RUT) is poised for a positive surprise this quarter or strong growth in 2014 isn’t enough to tell you where to invest, because the disparity in earnings from company to company can be immense.

“As is typically the case, Russell 2000 (INDEXRUSSELL:RUT) earnings are defined by a smaller number of companies,” writes Chronert. For this quarter it’s projected that just 400 companies will account for two-thirds of earnings for the entire index. With such a big disparity in performance, Chronert advises to be careful when looking at any aggregate data for the Russell 2000 index.

R2000 earnings skew Mid-Cap Indices

Lowest Buy-rated PEs on the index

PennyMac Financial Services Inc (NYSE:PFSI), West Corp (NASDAQ:WSTC), and Medley Capital Corp (NYSE:MCC) are the only stocks that Citi rates as a Buy with less than 10x PE and a market cap under $6 billion, and PFSI is also one of the three cheapest Buy rated stocks as measured by price-to-book value (again with market cap under $6 billion), along with Triple-S Management Corp. (NYSE:GTS) and UCP Inc (NYSE:UCP).  After a year of steady multiple expansions, Buy-rated stocks that haven’t yet seen their valuation increase could be a good place to start looking for a deal.

RUT lowest PE 0114