Many small-cap stocks lost ground in 2022, as rising costs hurt profits, but the situation could reverse, Goldman said, creating opportunities for investors if they know where to look. “With inflation expected to moderate, companies that can at least stabilize their gross margins this year and expand significantly beyond that should be well positioned,” analyst Deep Mehta said in a research note. The consumer price index has fallen from a peak level of 9.1% last June, but remains high. In December, consumer prices rose 6.5% from the previous year. Economists expect the trend to continue, as the Federal Reserve raises interest rates to cool it down. Inflation and Fed rate hikes have weighed on stocks. Last year, the Russell 2000 fell 22% from 2021, the worst annual performance since 2008. By scanning the names of small-caps that underperformed as fast as rising costs cut into earnings, investors can find stocks that are likely to show the biggest gains as a price. energy, transportation and other materials easily. Goldman is screening small stocks that are expected to show gross margin expansion through 2024. The bank found companies that reported a gross margin decline of more than 50 basis points, and that could see gross profit expand by at least 100 basis points from 2022 to 2024 Basis points equal to 0 .01 of a percentage point. The names below showed the biggest gains between the two time periods, making them Goldman’s picks as inflation eased. Allegiant Travel, parent of low-cost airline Allegiant Air, is expected to increase profits. Airlines were hurt by rapidly rising energy costs last year. But lower energy costs are one factor driving down consumer prices. Goldman said there is a risk of trade falling as the economy slows. That will reverse the key Allegiant 2022 tailwind: the desire to travel. Apparel and accessories retailer Gap is expected to add 260 basis points from 2022 to 2024, Goldman said in the note. The company is benefiting from new management that is focused on improving the company’s operating costs. High transportation costs were a hit to Gap’s bottom line last year, and those costs should ease next year. Consumers are also more likely to spend on clothes when their wages are less than on food and rent. More revenue could also help Runway Rentals, which is set to complete an IPO in 2021. The company has been struggling since its business was hit by the pandemic. But the clothing-sharing startup is on track to raise its margins even higher as it partners with other third-party retailers. It recently announced a collaboration with Amazon. Rent the Runway CEO Jennifer Hyman said the relationship could be a “key engine” of growth for the retailer. The Russell 2000 has also started to rebound in recent weeks, on hopes that the ultra-high rate of inflation seen in 2022 will finally break. The small cap index has gained 7.4% annually in 2023.