Breaking News

Investors seek gems among unloved small-caps

Stock MarketsAug 26, 2017 10:25PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. FILE PHOTO: Traders work on the floor of the NYSE in New York

By Sinead Carew

NEW YORK (Reuters) - U.S. small-cap stocks, highly sensitive to the fate of President Donald Trump's policy ambitions, may face more selling pressure, leaving small-cap investors scrambling for quality names and more resilient sectors.

Small-caps, which are more reliant on U.S. policy and economic conditions than are large multinationals, have fallen recently on rising doubts that Trump can deliver on pro-business promises such as tax cuts.

After outperforming in late 2016 after Trump's election, the S&P 600 index of smaller companies (SPCY) has fallen 1.4 percent in 2017 while the Russell 2000 (RUT), which includes smaller firms, is up 1.4 percent versus the S&P 500's 9.2 percent rise.

With Russell 2000 and S&P 600 multiples above historical averages, small-cap investors are carefully picking their steps.

"There's a lot of value in small-cap land if you can look through the rubble," said St. Denis Villere III, portfolio manager at Villere & Co in New Orleans, LA.

Some strategists are bearish on the small-cap sector as a whole, citing a patchier earnings outlook than for multinationals as well as doubts about Trump's agenda.

And small-cap indexes, which are typically more volatile than the S&P 500, may face high volatility in coming months as U.S. lawmakers debate controversial issues such as the debt ceiling.

Smaller companies are "much more at risk than the large and more internationally exposed companies," according to Michael Purves, Chief Global Strategist at Weeden & Co, who cited concerns about the lack of a "cohesive mood" in Washington.

The S&P 600 price/earnings ratio is currently 19.7 compared with its long-term average of 17.3, while the Russell 2000 forward P/E is 25.4 compared with its 21.3 historical average.

As a result, Jefferies equity strategist Steven DeSanctis says, the Russell 2000 could fall 10 percent or more, bringing it below where it was before Trump's Nov. 8 election as valuations are high and "volatility is on the rise."


The bearishness is sending investors to seek value in specific small-cap sectors and stocks that still look cheap but have strong growth prospects.

For example smaller financial and information technology stocks are strong value contenders while utilities and consumer staples stocks are out of favor among many investors.

"Given that the economy is better, we're more cyclical biased. That leads us to companies from technology to industrials," said Michael Corbett, chief investment officer at Perritt Capital Management in Chicago, who focuses on small-caps. "Valuations within staples look expensive today, whether it's food or utilities."

Jefferies' DeSanctis is bullish on the technology sector because of its exposure to strong overseas growth and he also likes financials and travel and leisure bets but is wary of retailers, real estate, utilities and materials.

"Financials are a longer-term trend. This is not a thing that's six or 12 months. It's longer-lasting outperformance," he said, citing higher rates and slow deregulation for banks.

Villere is wary of utilities and energy companies but likes technology and some consumer companies.

There is a divergence of performance between some individual small-cap sectors and their larger counterparts, potentially opening a value opportunity for investors.

For example, the S&P 600 financials sector (SPSMCF) is down 6.7 percent year-to-date compared with a 6.2-percent increase for its S&P 500 counterpart. But the S&P 600 financial sector's forward P/E ratio of 15.9 is below its long-term average of 17.4 while the S&P 500 financial sector's multiple of 13.8 compares with a long-term average of 12.8.

In comparison, the S&P 600 utilities sector <.6SP55> has risen 15.8 percent so far this year and its forward P/E of 23 is well above its long-term average of 16 versus a 12.8 percent rise for the S&P 500's utility index (SPLRCU), which has a P/E of 17.9 compared with its long-term average of 13.9.

Such divergences are making small-cap investors wary.

"It's prudent to not get out of the market but move to higher quality. Try to invest in a more discerning way," said Chris Zaccarelli, Chief Investment Officer at Cornerstone Financial Partners, in Huntersville, NC.

Investors seek gems among unloved small-caps

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email