Wall St Week Ahead – Investors bet on a second wind for lagging US small caps


Some investors believe the stars are aligned for small-cap stocks, as the category is expected to benefit from cheap valuations, robust economic growth, and a relatively benign impact of impending tax policy changes. About $ 2.4 billion has been poured into U.S. small-cap equity funds so far this month, already the biggest monthly inflow since March, according to data provider EPFR. This had helped fuel an 8% gain in the S&P 600 Small Cap Index at the start of the week since late October, doubling the performance of the S&P 500 large cap over that time frame. The Russell 2000, a larger index of small caps, gained around 7% during this period.

Small-cap indices reduced their gains somewhat this week amid fears of a re-emergence of COVID-19. Small caps, which have a median market cap of $ 1.2 billion in the Russell 2000, rallied in the first months of 2021, with investors betting that small businesses would benefit more from a large reopening of the market. American economy. They collapsed in the following months, as tech stocks took the reins of the market, fearing whether the Delta variant of the coronavirus would stifle the economic rebound. The Russell 2000 is up 19% this year compared to a 25% rise for the S&P 500.

With a meteoric rally in the S&P 500 stretching large-cap valuations and US growth above trend next year, some investors are now thinking small caps are a bargain. The forward price-to-earnings ratio of the Russell 2000 to the large-cap Russell 1000 recently stood 24% below its long-term average, while small caps are also trading at historic haircuts on. other metrics such as price / book value. and the selling price, according to BofA Global Research.

“Smaller cap stocks on a relative basis just look a lot more attractive,” said Ryan Jacob, chief investment officer of Jacob Asset Management. His company’s growth equity funds “probably have our highest weightings on record” in small-cap stocks versus large stocks, Jacob said.

RBC strategists have said the US economy is expected to grow 4% next year, up from a long-term average of 2.5%, and believe small caps are “pure play” on domestic growth. Analysts at BofA Global Research said the disparity in valuations between larger and smaller companies suggests high single-digit annual returns for the Russell 2000 over the next decade, compared to slightly negative annual returns for the Russell 2000. S&P 500. Chuck Carlson, CEO of Horizon Investment Services in Hammond, Indiana, said his company has increased its exposure to small caps over the past four months, including shares of shipping company Matson and semi-company. Onto Innovation drivers.

“After trading pretty much sideways for seven months, you’ve had a pretty nice breakthrough,” Carlson said. “We like the fundamentals.” The improving situation for small businesses is a relief for investors looking for ways to diversify the mega-cap tech stocks that have driven markets up for most of the past decade, with the top five companies accounting for they alone more than 23% of the weight of the S&P. 500.

“Now you don’t have to be in a FAANG stock anymore to get reasonable growth,” said Mike Petro, portfolio manager of the Putnam Small Cap Value Fund, using a common acronym for technology and growth stocks. massive companies such as Apple and Amazon. “You could be in forgotten small cap stocks and get reasonable nominal growth on that.” Jacob, of Jacob Asset Management, reduced his holdings in large-cap stocks Alphabet and Facebook’s parent company Meta Platforms, while favoring smaller companies such as OptimizeRx and Digital Turbine.

Some investors remain wary of small caps, which over the past decade have generally lagged behind, with the Russell 2000 rising 230% against a 285% gain for the S&P 500. Signs of a new one. COVID-19 wave is taking a bigger hold in the United States, as it has done in some European countries, could once again push investors out of economically sensitive stocks towards tech companies, which should be resilient short-term growth fluctuations.

Wells Fargo Investment Institute strategists this week urged investors to take profits on the earnings of “lower quality” small-cap stocks and invest in larger-cap companies, saying the economy is entering the phase. intermediary of its expansion where growth has historically slowed. . Others, however, believe they could be some sort of heaven if the tax policy changes backed by the Biden administration were enacted, particularly a 15% minimum tax on companies making more than $ 1 billion. .

If that happens, “the impact on small caps may be less than on large caps,” said analysts at Ned Davis Research, which recently began to favor small-cap stocks.

(This story was not edited by Devdiscourse staff and is auto-generated from a syndicated feed.)

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