Hulbert: Small Cap Sector Shockingly Overvalued

In a recent MarketWatch article, Mark Hulbert reveals a revised calculation that the small-cap sector is currently valued at a whopping 78.7 times earnings. He writes, “the Russell 2000’s true P/E today is higher than it was at either the top of the internet bubble or the 2007 bull market peak.” Hulbert describes the calculation, which he credits to financial services firm INTL FCStone’s Vincent Deluard, who told him that nearly a third of the companies in the Russell 2000 index are losing money. This omission, writes Hulbert, “has huge consequences.” Neither the FTSE Russell (the company that created the […]

Small Companies on the Decline, says Zweig

The number of publicly-traded companies has declined by half over the past two decades, with most of the decrease attributed to the smallest companies, writes Jason Zweig in last week’s Wall Street Journal. Zweig questions, however, whether this is making it more difficult for “stock pickers to beat the market and for investors to forecast future returns from past data,” an assertion the columnist made in an earlier article. Zweig cites comments from AQR partner Ronen Israel: “That part of the universe is so small that it doesn’t really affect most portfolio managers because they can’t invest there anyway.” Israel […]

Small Cap Stocks Losing Earnings Steam

The global growth outlook, more than a smoothing of the Trump bump, has resulted in small-cap stocks losing the upper hand—a dramatic shift from what happened right after the election. This according to The Wall Street Journal’s Steven Russolillo. Small-cap stocks (those with market capitalizations generally under $2 billion) spiked by more than 11% between the election and last Thanksgiving, writes Russolillo, who explains that many traders bet on the new president’s tax cuts and infrastructure spending plans (that would be most beneficial to smaller companies). But the gains have “fizzled.” “The main factor behind the recent weakness is earnings […]

7 Promising Small-Cap Growth Stocks for 2017

Celebrated investor James O’Shaughnessy wrote What Works on Wall Street (1996) after conducting exhaustive research concerning the performance of a host of investment strategies. This work led to the development of his Cornerstone Growth Strategy, outlined by Validea CEO John Reese in this week’s TheStreet. Using the screening model Reese fashioned after the O’Shaughnessy strategy, he identified the following 7 small-cap picks: Of the seven, he highlighted the following stocks that scored well under other Validea models: Huntington Ingalls Industries (HII) designs, builds, overhauls and repairs ships for the U.S. Coast Guard and the U.S. Navy and scores well based […]

The Trump Victory and the Small-Cap Reversal

While over the past ten years large-cap stocks have outperformed small-caps, the recent election upset caused a rally in the latter and added complexity to the relationship between the two. In a recent Forbes article, Validea CEO John Reese addresses implications related to this shift and offers the following small-cap picks: Sanderson Farms (SAFM) is a producer, processor, marketer and distributor of fresh and frozen chicken (market cap $1.94 billion) that earns high marks for its debt-free balance sheet, growth in earnings-per-share and liquidity. Smith & Wesson Holding (SWHC) manufactures firearms and accessories for the outdoor enthusiast (market cap $1.32 […]

Small-Caps on the Upswing

As all eyes continue to be on the president-elect, questions abound regarding if and how he will implement the changes he championed on the campaign trail. In the meantime, however, an article in this week’s Barron’s argues that his election has proved a shot in the arm for small-cap stocks. That article asserts that, since election day, the small-cap Russell 2000 index has risen 10% compared with the S&P 500’s 2% gain and “the advance of the market’s small fry isn’t over yet.” The following factors are cited: On the campaign trail, Trump called for more protectionism and less global trade, both […]

How Could Rising Rates Affect Small-Cap Stocks?

As we continue to wait for the Fed to move on rates, questions loom as to how a rising rate environment will affect the markets. In a recent article for Proactive Advisor magazine, Validea CEO John Reese shared his thoughts on how this could specifically impact small-cap stocks. Conventional wisdom, he explains, says that rising rates can negatively affect small-cap performance (companies with market capitalizations of between $250 million and $2 billion) since: It leads to increased costs of the capital necessary for growth. Small-caps tend to be more dependent on future revenue streams, and higher rates generally lead to […]

Investing Principles: What Has Worked

For the next several weeks, our daily blogs will include information from a 1992 publication by the investment firm Tweedy, Browne Company LLC entitled What Has Worked in Investing: Studies of Investment Approaches and Characteristics Associated with Exceptional Returns. The booklet includes data from over fifty studies of share performance woven together with insights based on the firm’s five plus decades of industry experience as to which stock characteristics have provided the best returns over time. Our blogs will provide synopses of various sections of the booklet, which Tweedy says provides “empirical evidence that Benjamin Graham’s principles of investing, first […]

Big Opportunity In Small Stocks?

It’s no secret that the market doesn’t look too cheap right now. In fact, by many measures, it’s overpriced. But the difference in the valuation of small stocks and large stocks right now is striking, Validea CEO John P. Reese writes in his latest column for Forbes.com. “Since the end of 2005, my company has been tracking the valuation characteristics of the several thousand stocks in our database, a pretty good approximation of the U.S. market,” Reese explains. “Since then, they have traded at an average trailing 12-month P/E ratio of 19.1. Currently, the average is 21.3, representing an 11.2% […]

Investing in Small Caps – Beware of Style Drift & Avoid Junk

If you are investing in small cap stocks, it is important not to make these two big mistakes writes Mark Hulbert for Barrron’s, because after few years of lackluster relative returns small caps look poised to turn the corner. As Hulbert points, smaller cap stocks have outperformed large caps over the long term but “for the past five years the Russell 1000 (which contains the 1,000 largest U.S. stocks) has beaten the Russell 2000 (the next 2000 by market value) by nearly five percentage points per year”, but in 2016 the trend has started to potentially shift. In anticipation of improved […]

Small Caps Offer Opportunities, Especially When Rates are Rising

Chris Tessin of Acuitas Investments recently authored a piece for the InvestmentNews that outlined the historical pattern of micro-cap and small cap outperformance during periods of rising interest rates. Tessin notes that small firms have now lagged large cap names on a 1, 3, 5 and 10-year basis, and that relative underperformance is now producing an investment “opportunity”. According to Tessin, smaller firms have a history of outperforming during periods of increasing interest rates, and the magnitude of outperformance is “greater than the long-term relative return premium normally associated with investing in these asset classes.” There are two reasons why […]

Comparing Active and Index/Passive Small-Cap Funds

Writing in Adviser Perspectives, Larry Swedroe of the BAM Alliance evaluates the performance of the 10 largest (by assets under management) actively managed small-cap funds over the period 2000-15 in comparison to the performance of small-cap Vanguard index funds and Dimensional Fund Advisors passively managed structured asset class funds, and also uses S&P Indices Versus Active (SPIVA) Scorecard data for a similar comparison over the 2005-15 period. His broader purpose is to investigate the claim that “the market for small-cap stocks is less informationally efficient, thus allowing [active managers] to uncover mispriced securities and generate alpha.” He concludes that “the […]

MarketWatch’s Hulbert: Now Could Be the Time for Small-Caps

Mark Hulbert writes in MarketWatch that “all of [the small-cap] sector’s much-vaulted historical relative strength has come at the end of December and early January,” as reflected in the monthly average outperformance of small-caps vs. large-caps 1926-2015. According to Dartmouth professor Ken French, small-caps usually hit a low around December 20, followed by the highest yields in January. The long-term outperformance by small caps is 2.2%, according to Ibbotson data. French’s day-by-day analysis suggests, however, that from late December to end of January the return is an average of 2.5%. Hulbert reminds investors that these are averages over 89 years […]

Profitably Switching In and Out of Small-Cap Stocks

  Joe Mezrich, strategist with Normura securities, and colleague Adam Gould have shown that three factors correspond with small-cap performance: low price-to-sales cost relative to large stocks; economic uncertainty (reflected in dispersion of earnings estimates); and expectations for economic growth (measured by treasury yields). As stated in Barron’s, small-caps should outperform “when small companies represent a good value and when investors aren’t driven to big names.” Market history since 1980 bears this out. Mezrich and colleagues showed that when these factors are favorable, small-caps gained an annualized average of 7.6% over the next three months. Earlier in the month, Mezrich forecasted […]