Barclays | U.S. Small & Mid Cap Strategy20 July 2018 2OVERVIEWIn our 21st quarterly edition (launched August 6, 2013) of Small & Mid Cap Selections, weaim to identify 10-15 attractive stocks from our SMid-Cap coverage universe of 340+ stocks(with market caps under $7 billion) by overlaying a simple risk-adjusted returns frameworkon stocks where our analysts have high conviction. We also take into consideration liquidity,risk/reward characteristics, a minimum return threshold, recent performance, and balancesheet strength – attributes that are relevant from a portfolio manager’s perspective. Figure 1 contains a snapshot of the Barclays Small and Mid Cap coverage universe and Figure2 shows a distribution of the Barclays Small and Mid Cap coverage universe by GICS sectors. FIGURE 1 Barclays Small and Mid Cap Equity Coverage Universe TotalOverweightEqual WeightUnderweight Number ofStocks34211216961 % of Stocks 100%33%49%18% Source: Barclays Research. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight.Data as of 7/18/2018. FIGURE 2 Barclays Small and Mid Cap Coverage by SectorSource: Barclays Research. Data as of 7/18/2018. ConsDisc 14% ConsStap 4% Energy 14% Finan 16%HlthCare 12% Indust 15% InfoTech 14% Material 4% RealEst 7% Barclays | U.S. Small & Mid Cap Strategy20 July 2018 3Risk-Adjusted Returns Framework and Selection Rationale To arrive at our Small & Mid Cap Selections, we used a risk-adjusted returns frameworkoutlined below. Our final stock selection comprises of stocks that fit our rules-basedselection criteria that are also a part of the Barclays SMid-Cap coverage universe. Fundamental Coverage Analyst ConvictionOf the Barclays equity coverage universe of 342 small and mid cap stocks, we started with aset of high conviction stocks identified by our individual analysts. These are stocks whereour fundamental analysts have an Overweight rating. Currently, 33% (112 stocks) of ourcoverage universe has an Overweight rating. This list was then chiselled down by applying aset of rules to arrive at the final set of 19 names. Minimum Threshold for Upside PotentialWe filtered for stocks with an upside potential of at least 15%. This is the upside to the pricetarget established by our coverage analysts and does not take into account the potentialupside to their upside case. Attractive Risk/Reward Our analysts provide an upside and downside scenario for every stock they cover. Using thisupside/downside framework, we look for a risk/reward ratio of at least 1.5:1. We define therisk/reward ratio as the ratio of the total absolute positive return potential to the upsidecase to the total absolute negative return potential to the downside case. For example, if astock is currently trading at $10 and the upside case is $13 while the downside case price is$9; the implied risk reward is 3:1.Quantitative Quality Score ThresholdWe filtered for stocks that had a quality score of at least 3 within our small cap coverageuniverse. The quality score is a quantitative metric that is designed to capture theprofitability, strength of balance sheet, and the earnings quality of a company that isnormalized within sectors. Liquidity ThresholdLiquidity is an important element in any investment process and especially so for small capstocks. To factor in the liquidity element, we estimate a liquidity metric of Dollar VolumeTraded (the 20-day average notional amount traded X price in USD) for each stock and forthe Russell 2000 index as a whole. We then apply this liquidity filter to identify stocks thathave a turnover at or over the 40th percentile of the Russell 2000 universe (corresponding to~$4.0 million/day in trading volume). Volatility Normalized Upside ThresholdIn addition to the absolute upside potential to price target, we also used a volatilitynormalized upside metric to pick only those names that have adequate upside potentialrelative to realized volatility. We established a minimum threshold of 0.3 for this metric tostrike an adequate balance between upside potential and realized risk exhibited by a stock. Barclays | U.S. Small & Mid Cap Strategy20 July 2018 4Recent PerformanceSecurities that have had a sharp decline in price in the recent past may seem like good values,but could simply reflect deteriorating fundamentals. Therefore we remove any securities thathave underperformed the Russell 2000 by more than 10% in the previous month or by morethan 30% in the prior three months.Allow for higher growth in recent IPOs, smaller stocks, and high convictionnamesSecurities with market capitalization below $1bn or those that have had a recent IPO tend toexhibit weaker quality but stronger growth characteristics. Therefore, when screening, we donot remove stocks with market caps under $1bn or those with recent IPOs based on theirquality score. Additionally, we include stocks that miss the quality score screening but havehigh conviction on risk-adjusted returns from our analysts over the next 3-6 months.Distilling the Investment RationaleOnce we identified our stock selections using the risk-adjusted framework described above,we highlight our analysts’ concise investment rationales and key investment considerationsfor each security along five distinct elements: The Investment Thesis Upcoming Catalysts Valuation and Price Target Upside/Downside Scenario Framework Investment RisksCommon Themes in Small & Mid Cap SelectionsUsing the above criteria, with a screening date as of 7/8/2018, we identify 19 stocks (Figure3). The investment rationale for each of the Selections is presented in the followingcompany-specific sections. We note that our stock selections have a few reoccurringthemes and also share a few common characteristics. In this quarterly edition, as a themewe see a trend toward a pickup in earnings expectations, stronger top-line growth throughproduct and customer base expansion, as well as an increase in cost cutting initiatives.Increasing earnings expectation: Improving earnings expectations in the near termshould drive returns for these companies: AIV, BMS, LOGM, RPD, and WAL. Stronger top-line growth: These companies look to continue the acceleration in theirtop-line growth through new product offerings as well as the expansion of theircustomer base: COHR, FND, JBLU, LITE, PK, and RDN. Heightened cost-cutting initiatives: An increased focus on cost cutting has improvedmargins for the following companies: BMS, BERY, DNB, and JBLU.。。。。。。