Small caps rally may continue as recovery quickens pace
(St. Louis Post Dispatch)
Matt Jermak, senior portfolio manager of Argent Capital Management’s Small Cap Strategy, said opportunities abound for small-caps, despite their volatility. “We are finding more opportunities in small-caps than any time in the past three years,” Jermak said. “Over the next year or two, it continues to remain fertile ground fro attractive returns.”
July 03, 2011 (Lisa Brown)
Small-cap stocks have been on a roll, performing well over the last decade and particularly well in the early stages of the economic recovery, but how can long small-caps’ strong run last?
There’s a reason investors have been bullish on small-cap stocks: for the past three years and year to date in 2011, the Russell 2000 index has outperformed broader indices. So far this year, the Russell 2000 — considered a benchmark for small-cap stock performance — has gained 7.2 percent versus 6.52 percent by the Standard & Poor’s 500 and 6.15 percent by the Nasdaq Composite.
Small-caps are generally those companies that have total outstanding shares valued below $3 billion. A few of the companies in the Russell 2000 index are 99 Cents Only Stores, Ameristar Casinos Inc. and Hibbett Sports Inc.
“Small-cap stocks, especially since 2008 lows, have done uniquely well,” said Richard Sinise, portfolio manager of Kennedy Capital Management in Creve Coeur.
Despite the sector’s strong rally, analysts remain bullish on the small-cap prospects, citing the recovering economy and strong earnings growth as strong tailwinds.
The Great Recession was tough on small companies, which lacked the deep pockets of an IBM or Coca-Cola, yet their restructuring efforts appear to be paying off.
Banks’ pressure on small companies to pay down loans in recent years led to restructuring and layoffs, which boosted companies’ earnings, Sinise said.
“Banks gave them no choice but to downsize, and as a result, small-cap companies were able to show EPS (earnings per share) growth.”
In its midyear market outlook released last week, St. Louis-based Wells Fargo Advisors noted that earnings continue to improve for mid- and small-cap stocks.
“As the breadth of the economic recovery widens, earnings for smaller companies may grow faster than for large companies as their fundamentals catch up,” the Wells Fargo Advisors report stated.
Matt Jermak, senior portfolio manager of Argent Capital Management’s Small Cap Strategy, said opportunities abound for small-caps, despite their volatility.
“We are finding more opportunities in small-caps than any time in the past three years,” Jermak said. “Over the next year or two, it continues to remain fertile ground for attractive returns.”
Still, analysts say the economy remains the wild card with small-cap investing.
Investors should gauge the temperature of the economy when choosing between small- and large-cap stocks, Sinise said.
“Generally, when the economy is doing well and there’s GDP greater than 2 percent, small-caps will do well,” he said. “When GDP growth is slower or stagnant, large-caps will tend to do well.”
For that reason, Scott Wren, senior equity strategist with Wells Fargo Advisors, remains cautious about loading up on small-caps.
As long as the economy is making modest, grinding progress, large-caps will fare better in the near term, he said.
Yet, that could change as the economy improves and moves into the next phase of recovery.
“I envision a year from now, us being overweight in small-cap stocks,” Wren said. “It could be as early as the end of this year.”
And one should even consider the particular small-cap sector. Industries investors should consider for opportunities in small-cap stocks are aerospace and trucking, Sinise said.
What percentage small-caps should be represented in each investor’s portfolio varies. In a recent note to investors, Jim Dunigan, executive vice president and managing executive of PNC Bank’s Asset Management Group, said PNC’s strategy is to have 85 percent of its equity allocation in large-caps, 10 percent in mid-caps and 5 percent in small-caps.
“All investors should have some exposure to small-cap equities; the appropriate weighting depends on their specific circumstances,” said Chris Stein, vice president and portfolio manager of Confluence Investment Management in Webster Groves. “Over the long term, small-cap stocks have outperformed large-cap stocks, and we don’t expect that’s going to change.”