Small cap stocks are off to a good start this year, up over 3% this month. Furthermore, a strong start tends to signal good gains for the whole year. There is a lot of reason to be positive—the economy is good, regulations are being rolled back, and the bull market for small caps is much younger (less than two years since a big correction). However, risks abound, according to Barron’s, especially in the long-term. Valuations are still high by historical standards, and are actually higher than they first appear. Smaller companies are also more in-debt and more exposed to interest rate rises than many realize.
FINSUM: We think small caps will keep rising so long as the broader market does. Also, the fact that they had a 25% correction which ended in February 2016 gives them a bit more breathing room than their large cap peers.
This Barron’s article considers the impact of the Dollar, which is at a 14-year high. The article warns the strong Dollar could cause big problems for investors in US equity markets. The big problem is that US companies, especially large ones, derive a good portion of their revenue from overseas, so a stronger currency means less Dollar revenue after it is converted. This may cause a rotation into small and midsize US stocks, whose overall share of overseas profits is much less. European stocks also look likely to rise, as the Euro is weaker and the ECB has pledged to keep going with stimulus.
FINSUM: Good piece giving an overview of how the strong Dollar may shake out. Also, don’t forget that a strong Dollar has a negative impact on oil, gold, and other commodities.
This Financial Times article says that one of President-elect Donald Trump’ policies could be very good for stock markets. Which one? Lower taxes. Trump wants to cut the corporate tax rate, and congress is in agreement, making it likely to happen. According to Citi, if the rate was cut to 20%, it would add $12 to their top-down estimate of $129 for 2017 S&P 500 earnings per share. Just as interestingly, the implications for if Trump offers a special repatriation rate are huge. With so much money offshore, repatriation could yield big dividends and buybacks that would send stocks surging.
FINSUM: The EPS adjustment is up near 10%, and that is a big deal. One interesting thing to consider here is the small caps versus large caps issue. The former have outperformed since the election because of the possibility of trade tariffs, but it is the big companies that have money offshore, and their shares could boom because of buybacks. However, they could also be held back because of a high percentage of overseas sales. Which will be a better buy?
Source: Financial Times
This Wall Street Journal article says that investors should think about shifting money into large cap stocks in the fourth quarter. The reason why is that large institutional investors tend to put money in large cap stocks at the end of year for a number of reasons, including tax loss harvesting and year-end window-dressing (getting rid of losing stocks so they do not have to be seen to hold them). While small caps have historically outperformed large caps by a considerable margin, this pattern reverses in the fourth quarter when large caps tend to outperform smaller stocks. As such, investors could capitalize by the moves of large funds by shifting some of their holdings into larger cap stocks as we head into the year’s end.
FINSUM: This is very interesting information that we had not seen communicated anywhere else. We wanted to pass along for readers’ consideration.
Source: Wall Street Journal
Most will know that small cap stocks were wounded more badly in the market selloff last quarter than their large cap cousins. Overall, small caps are down 4% since 2014, while the S&P 500 is up 12%, though small caps still aren’t cheap. With that in mind, this piece borrows from the opinion of the $1.2 bn Wasatch Core Growth fund (WGROX), to choose four fast-growing small stocks. The four small caps it chooses are Spirit Airlines (SAVE), Waste Connections (WCN), Cimpress (CMPR), and Credit Acceptance (CACC). The case the article makes for Spirit is based on the idea that the airline has been built from the ground up for low costs, so it has a strong inherent advantage over larger carriers and can maintain low prices in a way others cannot.
FINSUM: Good article. We particularly liked the argument for Spirit, but it is always good to read these pieces to discover some hard-to-find, but often very worthwhile companies.