Displaying items by tag: small caps
One of the big beneficiaries of all the geopolitical events of this year, as well as of rates hikes, has been small caps. Smaller companies tend to perform better in economic expansion, and they look more likely to hold up to foreign trade tensions as they have a more domestic focus. After hitting records in August, small caps are now in correction territory, having lost 10% from their high. They are now underperforming large caps for the first time this year as many see trade tensions easing.
FINSUM: Small caps sometimes suffer at the end of economic expansions, so this move makes sense. Still an almost 9% loss in the Russell 2000 this month is rough.
The Wall Street Journal says the conventional logic as to which stocks are safest during periods of rising rates is wrong. The traditional play is to buy into large, safe, dividend-payers. However, over the last thirty years, those are exactly the stocks to avoid during rising rate periods. A better decision, if history is any guide, is to put your money into small caps and cyclical sectors. Small caps have outperformed large caps by a wide margin in rising rate periods, as have growth investments and cyclical sectors.
FINSUM: Straight dividend payers are not the best choice. Dividend growth stocks are likely a much better choice, and small caps seem like a good idea as well as they tend to see the biggest gains in strengthening economies.
Small cap stocks have been taking it on the chin. They have been getting hammered this week, and their performance (Russell 2000) has lagged the S&P 500 by almost 3% the last few days. That is a rare occurrence, which means there may be a buying opportunity. After such a bout of bad performance, the Russell 2000 has historically outperformed the S&P 500 by a percentage point over the next 20 days.
FINSUM: This could be a good short-term buying opportunity, but as ever, we struggle with these kinds of trade ideas because they seem to be based purely on historical precedent and lack any catalyst.
Tech stocks and large caps have been getting all the headlines this year. There is increasingly a fear that only a handful of high-powered large stocks are driving the market. However, the reality is different, as small caps have been doing great. In fact, small caps have actually outpaced even the tech giants in appreciation this year. That is a very healthy sign for the market as it shows expanding breadth, which is typically a sign of a strong bull market that will continue. According to Bob Doll, famed portfolio manager from Nuveen, “Bull markets eventually end, and typically by the time you get to the peak, breadth is gone … This is a broad market move. It’s a good thing. It’s healthy.”.
FINSUM: We agree that this is very good news for the market. Even better, strong earnings growth has tempered high valuations, making things just a bit more reasonable.
Morgan Stanley disclosed this week that it has upped its holdings in two small stocks to above 5%. While one can get a lot of info (however biased) from equity research divisions, there is nothing like seeing what banks are actually buying themselves. In this case, the two stocks are Electronics for Imaging, and Turtle Beach. The former is a digital imaging firm whose shares have been rising this year, and the latter is a gaming headset maker who shares have risen 15x this year, but is still only worth $392m.
FINSUM: Gaming headsets seem like a good growth area at the moment, but are probably outside the skillset of most investors to judge.