Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19
US Corporate Debt Is at Risk of a Flash Crash - 10th Aug 19
EURODOLLAR futures above 2016 highs: FED to cut over 100 bps quickly - 10th Aug 19
Market’s flight-to-safety: Should You Buy Stocks Now? - 10th Aug 19
The Cold, Hard Math Tells Netflix Stock Could Crash 70% - 10th Aug 19
Our Custom Index Charts Suggest Stock Markets Are In For A Wild Ride - 9th Aug 19
Bitcoin Price Triggers Ahead - 9th Aug 19
Walmart Is Coming for Amazon - 9th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

Profit From Small Cap Stocks After the Recession

Stock-Markets / Investing 2009 May 18, 2009 - 04:51 PM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleMike Caggeso writes: Right now many investors probably don’t want to shoot for the moon. The global financial crisis gave their portfolios one the fiercest beat downs since the Great Depression, draining investors’ resources and mood for anything but safe investments.


But it’s unfair to associate small-cap investing as moon shooting, especially as the global economy pulls itself back together. Historically, small caps have beaten the socks off blue chips as both emerge from recession.

After the 1973-74 recession, small stocks beat larger ones for the following 10 years. Going back further, to 1932, the year before the Great Depression ended, small cap stocks beat the market for 11 of the following 13 years, CNNMoney reported.

More recently, however, the Russell 2000 Index (the most common benchmark of publicly traded small-cap companies) has gained 40.2% since the market bottomed on March 9. In that span, the blue-chip-weighted S&P 500 has chugged 24.2%

The difference isn’t extraordinary, but institutional investors who pour millions into these companies know the difference between those figures could spell fortunes.

And even on an individual level, you’d be hard-pressed to find an everyday investor unsatisfied with sitting on a 40.2% gain after a year and a half drought.

Small caps rebound faster because they are typically saddled by less debt and have fewer people on their payrolls – making it easier to restructure and regain footing.
                       
Compare that to behemoths like Ford Motor Co. (NYSE:) and General Motors Corp. (NYSE: GM), which have been reducing overhead, downsizing and streamlining operations for years.

Also, small caps’ operations and revenue streams are more regionally based, whereas a global titan like General Electric Co. (NYSE: GE) has operations all over the world. While a globally diversified business model ensures better overall stability, it also means more vulnerability at a time when the global financial crisis has crippled nearly every economy in the world.

What’s more, a recent study from the Paris-based Organization of Economic Cooperation and Development (OECD) shows that the United States’ economic deterioration is slowing down at a faster rate than Italy, France, England and China.

In Small Caps We Trust

For practical purposes, small caps can be defined as publicly traded companies with a market capitalization between $250 million and $1 billion. But that’s just an approximation, since there is no official definition or internationally accepted market-cap boundary.

Small cap stocks have fewer shareholders than mid-cap ($1 billion to $10 billion) or large-cap companies ($10 billion and up), and their lack of liquidity makes it much easier for the share price to spike, or plunge, with a major shift in trading.

Think of it them as boats in an ocean. The winds and waves will cause a small boat to rock much more than they would a tanker. But a strong current will push a smaller vessel to its destination faster than it would a larger ship.

Investors are attracted to small caps because they can take a larger stake in a company (and usually at a lower entry price) with the expectation that as the company grows – or gets bought out – their small investment will reap a large reward.

And right now – as the economy and stock market rebound from the vicious recession – it’s an especially good time to eye small-cap companies. Small caps have already proven to be the more profitable investment as global economies are licking their wounds.

Of course, there are two things to consider before investing a dollar in small caps.

The first is volatility. Because they companies are vulnerable to shifts in market sentiment, it is not advisable to apportion a large block of your portfolio in small-caps.

Secondly, now may not be the best time to jump in. Those closely watching small caps believe they have overshot their values – meaning a pullback is expected soon, if it’s not happening already.

Small caps stocks have risen 40.2% since March 9, but they are also down 5.9% from their May 8 peak.

All in all, we think [small-caps] have moved too far, too fast,” Bank of America Merrill Lynch small-cap strategist Steven Desanctis recently wrote to investors.

Desanctis expects the small-cap pullback to continue because small companies’ price-to-earning ratios have moved above average compared to those of larger companies.

Also, analysts expect at least a few more months of market-wide volatility – and the tossing and turning of small caps stocks may not sit well with many investors.

Medium-to long-term though, small caps have proven their profitability, especially when investors amass positions in a recession’s late stages. 

Here are six ways to invest in a variety of small cap stocks, should the current pullback present a favorable opportunity.

The iShares Russell 2000 Index ETF (NYSE: IWM) is a fund that tracks the movements of the Russell 2000 Index. The Fund invests in a representative sample of securities included in the index that collectively have an investment profile similar to the index.

The iShares Russell 2000 Value Index ETF (NYSE: IWN) tracks an index that measures the returns of safer, less speculative small-cap stocks. And the iShares Russell 2000 Growth Index ETF (NYSE: IWO) tracks an index that measures the returns of riskier, more growth-oriented small-cap stocks.

Vanguard also has variety of small cap funds, but they track the movements of a different index of small U.S. companies, the MSCI US Small Cap 1750 Index.

The Vanguard Small-Cap ETF (NYSE: VB) tracks the movements of the MSCI US Small Cap 1750 Index not only by amassing a position in nearly every company traded in the index, but attempts to mirror the proportions of those holdings as well.

The Vanguard Small-Cap Value (NYSE: VBR) tracks safer, less speculative small-cap stocks on the index. And the Vanguard Small Cap Growth (NYSE: VBK) goes for more growth-oriented returns on the index.

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever.

Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this "New Reality"will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "Golden Age of Wealth Creation" The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out our latest report on these new rules, and on this new market environment.

Money Morning/The Money Map Report

©2009 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules