Best of the Week
Most Popular
1.The Trump Reset, US Empire's Coming Economic, Cyber and Military War With China (2/2) - Nadeem_Walayat
2.Now Is the Time to Buy Gold - 5th Jan 17 - John Grandits
3.CIA Planning Rogue President Donald Trump Assassination? Elites "Manchurian Candidate" Plan B - Nadeem_Walayat
4.The Trump Reset - Regime Change, Russia the Over Hyped Fake News SuperPower (Part1) - Nadeem_Walayat
5.Most Popular Financial Markets Analysis of 2016 - Stock Market Crash Postponed Again - Nadeem_Walayat
6.No UK House Prices Brexit Crash 2016 Despite London Weakness, Forecast 2017 - Nadeem_Walayat
7.President Trump Understands the NSA, CIA... LIE, America's Intelligence Agencies Crime Syndicate! -Nadeem_Walayat
8.President Donald Trump's 2017 New Year Message, BBC Fake News, Was 2016 a Dream? - Nadeem_Walayat
9.Major Stocks Bear Market Still Looms - Zeal_LLC
10.Biased 2017 Forecasts - Debt, Housing and Stock Market (1/2) - James_Quinn
Last 7 days
The Story of the U.S. Regime Change Plan in the Philippines - 16th Jan 17
Gold Price 2017 Trending Towards $1375 as Forecast - 16th Jan 17
'Deep State' CIA Director States We are Not NAZI's, Warns Trump Does Not Understand Russian Threat - 15th Jan 17
UK House Prices Forecast 2017 - Crash or Bull Market? - Video - 15th Jan 17
SPX Stocks Bull Market Update - 14th Jan 17
President Trump vs the Deep State that Hides in Plain Sight - 14th Jan 17
The Impact of Sir Alex Ferguson's Retirement on Man United's Share Price - 14th Jan 17
What Can Stock Market Tell You About Politics? - 13th Jan 17
Big Gold Buying Coming 2017 - 13th Jan 17
A Bullish Case for Gold 2017 - 13th Jan 17
Will Stocks Bull Market Continue to Charge or is it Time to Sell the News - 13th Jan 17
Gold and Silver Off To Shining Start to 2017 - 13th Jan 17
Gold’s Fundamental Outlook for 2017 - 13th Jan 17
Is trading stocks and shares just as luck-based as roulette? - 13th Jan 17
Trump CIA Like Nazi Germany - Fake MI6 Intelligence leaked to Fake News Mainstream Media - 13th Jan 17
USD in Decline. SPX and TNX May Follow - 12th Jan 17
CIA War On Trump - Leaks Fake MI6 Intelligence to Fake News Broadcast Media - 12th Jan 17
Registered Address.co.uk London Business Registered Office Address Mail Forwarding Review - 11th Jan 17
13 Contrarian Economic Predictions For 2017 - 11th Jan 17
10 Potential Black Swans and Opportunities for the US Economy in 2017 - 11th Jan 17
How to Get a Bird of Paradise Plant to Flower - UK Growing Video - 11th Jan 17
The No.1 Energy Stock To Buy Right Now - 10th Jan 17
Frank Holmes: Gold Rally Extremely Likely in January and February - 9th Jan 17
Test Your Markets Trading Knowledge: Find the Clear Wave Pattern on this Chart - 9th Jan 17
Markets 2016 Past is 2017 Prologue - 9th Jan 17
Stock Market Major Indexes Reached New Record Highs - But Will They Continue Higher? - 9th Jan 17
Agri-Stocks and Agri-Food Prices: Both Strong - 9th Jan 17
The Two Hottest Commodities For Investors In 2017 - 9th Jan 17
Gold Price US$700? OR US$7000? - 9th Jan 17
Stock Market Tad More Distribution Needed - 9th Jan 17

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

What Can Stock Market Tell You About Politics?

Small Business Indicators For Microcap Sector Choices

Companies / Investing 2016 Jan 30, 2016 - 04:10 PM GMT

By: Submissions

Companies

Alfidi Capital writes: Microcap stocks are notoriously hard nuts to crack. They are the part of the capitalization-weighted investment universe that is typically less liquid, transparent, and profitable than large-cap choices. Investors do have some indicators they can use to estimate turning points in the microcap sector's aggregate health. A small number of microcap ETFs help diversify away company-specific risk.


The NFIB's Small Business Economic Trends (SBET) is one possible proxy for the sentiment of small business owner-investors. It combines data on both future plans and current results. The December 2015 report puts the Index of Small Business Optimism at 95.2, below the long-term average of 98. The small sample size and seasonal adjustments limit the index's usefulness. The SBET also does not disclose the average revenue, net income, or asset quality of its sampled businesses, so investors cannot presume any strong equivalency with microcap stocks.

The Wells Fargo / Gallup Small Business Index is probably a more robust indicator than the NFIB SBET. Gallup's index methodology also relies upon a small sample size but discloses a revenue range that could easily include the lower bound of the microcap sector's revenues. The index is one more addition to an investor's toolkit. BTW, this index also registered a decline in optimism in late 2015.

The Paychex IHS Small Business Jobs Index covers a vast sample size, so data quality here is less of a concern than with the previous two indexes. Measuring job growth helps investors determine whether small companies can afford to expand and handle higher sales volumes. Job gains at the end of 2015 were on a slight downward trend since early 2014, punctuated by some up months.

Dun and Bradstreet’s U.S. Economic Health Tracker covers a Small Business Health Index for payments and credit, with a large data set. The Tracker shows small business performance worsening so far this year, with weak payment performance. That makes two weak optimism indexes, a declining jobs index, and a weak payment/credit health index so far to start 2016.

Our macroeconomic data indicators for small businesses are not the only ways to understand microcaps. Investors need to know how different index providers assemble the microcap universe, because this ultimately determines ETF composition. The Boglehead wiki on US micro cap index returns compares several microcap indexes. The Wilshire index has the longest history, so performance data for products based on that index would be the most reliable.

Only a small number of ETFs cover the microcap sector. PowerShares Zacks Micro Cap ETF (ticker PZI, expense ratio 0.70%) and First Trust Dow Jones Select MicroCap ETF (ticker FDM, expense ratio 0.60%) are very thinly traded. Investors will face more difficulty with trade execution in thinly-traded securities. The Zacks product follows a proprietary index and the First Trust product follows a select index, so their returns are not directly comparable to those of ETFs that follow wider indexes.

The iShares Micro-Cap ETF (ticker IWC, expense ratio 0.60%) is more actively traded and has a larger market capitalization than PZI or FDM, and its construction from the Russell Microcap Index makes its methodology more reliable. Other details are less encouraging. It is currently heavily weighted toward the finance, health care, and information technology sectors. Those areas are all very much in bubble territory thanks to the Federal Reserve's easy credit (finance), unsustainable Medicare payouts (health care), and VC-funded startup unicorns gorging on cloud services (IT). Consider also how the R-squared result for IWC (at its Yahoo Finance risk data) declined from 77.77 at the 10-year mark to 47.66 in the most recent three-year period. The more recent period's performance thus has progressively less to do with the underlying index. That is a worrisome sign for an ETF that is supposed to stay very close to an index's results.

Investors are welcome to track the above four macro indicators and relate them to the microcap sector's leading products. Weakening indicators imply tougher times for small businesses. Leading index products that are increasingly divergent from their benchmarks (and more expensive than large-cap ETFs) are causes for concern.

The sad tales of microcap stock promotions gone wrong are always with us. The bad old days of investor relations conferences and seminars have given way to spam email stock scam promotions. Microcaps are easy prey for all manner of bad actors. The most broadly diversified instruments will at least give investors exposure to larger trends that can lift young, high-risk public companies to larger capitalizations.

Full disclosure: No positions in any securities mentioned.

Alfidi Capital

http://www.alfidicapital.com
http://www.facebook.com/alfidicapital
http://twitter.com/tonyalfidi

A virtual source for financial knowledge.

© 2016 Copyright Alfidi Capital - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2016 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

Catching a Falling Financial Knife