Small Caps
Podcast #23 - Investors Face Disparate Choices
Perusing current equity-investment possibilities highlights a diverse set of choices. Focusing on only two primary attributes—relative price and relative earnings—illustrates considerable diversity among the major investment styles.
VLT’s Struggles Are Telling Us Something
Our Very Long Term (VLT) Momentum algorithm has been a very good “confirmatory” market tool over the years, especially at the onset of a new cyclical bull market. But VLT has proven to be of little to no value in navigating this year’s gyrations. VLT’s latest flip-flops reinforce our view that the market leaderboard is set to be rearranged.
Small Cap Catch-Up?
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The big jump in Small Caps over the last two weeks has entirely reversed the segment’s summer underperformance and has technicians feverish about another “breath thrust.” Technically, it’s impressive, but we are more intrigued by the fundamental potential for continued Small Cap (and Mid Cap) outperformance.
The Valuation Case For “SMIDs”
Mid and Small Cap stocks underperformed in 2018 and 2019. However, after the collapse of February and March, these “SMID” Caps have largely kept pace with the torrid rebound in the blue chips. Today’s valuations are priming the SMIDs for a similar “decoupling” in the years ahead, like that following Y2K.
Profiting From Mighty Mites
One of the signature traits of the U.S. small cap market is the prevalence of money losing companies. A recent tally indicated that prior to Covid, 38% of small caps were reporting trailing year losses despite the widespread economic strength of 2019.
The “Next Big Thing” May Not Be Big
There’s one trend that’s lasted almost as long as the bull market and economic expansion and it hasn’t definitively come to an end. The current Large Cap Leadership Cycle hit the nine-year mark in April.
Preview: The Importance Of Quality In Small Caps
One of the signature traits of the U.S. small cap market is the prevalence of money-losing companies. Our recent tally indicates that even prior to COVID-19, 38% of small caps were reporting trailing year losses despite the widespread economic strength of 2019.
Revenge Of The Nerds?
Last month we detailed two technical shortcomings of the rally off the March 23rd market low. The stock market duly noted our critique and has issued its response.
Money Losers Among Small-Cap Growth
Late last year, we presented data showing that profitability has become more elusive for small companies despite a record-long period of economic expansion. We discussed the potential causes underlying this phenomenon.
Small Cap Valuations: Zombies And Ragamuffins
Asset allocation decisions are fairly straightforward for groups of profitable and growing companies that fit nicely into a discounted cash flow model, but it is more difficult to describe the valuation of groups that include unprofitable companies.
Where Are The Leaders We Need?
Small Caps lagged during the bounce off the March lows before a late-April spurt briefly pulled them ahead of the S&P 500. Still, considering that Russell 2000 losses were so much steeper than the S&P 500’s (-43% versus -33%), we would have expected something better.
This Bounce Lacks “Oomph”
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Through last night’s close, the S&P 500 had gained 25.0% in exactly one month. Impressive, but a bit superficial. Anyone running active equity portfolios recognizes the breadth of this move has been unusually narrow.
Are SMIDs Cheap Enough?
A composite measure of Mid Caps and Small Caps are at bottom-decile valuations relative to their 26-year histories. From a shorter-term viewpoint, though, we find it scary that valuations are so low just a single month into the recession.
Small Cap Smack-Down
We were fooled on Small Caps, and it’s been a “multi-factor” catastrophe.
Valuations: A “Progress” Report
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As deep as the losses in the DJIA and S&P 500 have been, most professional investors recognize that those averages have masked the extent of the damage suffered by most stocks.
A Developing Opportunity In The “SMIDs?”
The underperformance of Mid and Small Caps in the last few years has taken valuations from top-decile readings (and, indeed, a few all-time records) just 25 months ago, down to the middle—and even lower reaches—of their 30-year valuation boundaries.
Small Cap Quality Check
December’s Of Special Interest provided a recap of our Asset Allocation team’s view of small cap equities, suggesting that small caps had underperformed and reached a valuation discount that made them an interesting contrarian value proposition. Several clients responded with follow-up questions, wondering if the discount valuation of small caps was offset by their typically weaker business models.
Preview: Small Caps—Part 2
In response to client queries, we extended our research of small cap equities from last month. One angle we pursued was the relationship between small caps, quality, and business risk. The full report will be released mid-month.
A Small Cap Strategy Session
Leuthold’s research team has recently flagged a number of items that suggest it may be time to consider small cap stocks. This asset class has been showing signs of life and the decision to overweight small caps is starting to seem relevant – and perhaps nicely profitable - again.
A New Take On Small Cap Valuations
For valuation work, we’ve traditionally favored the 1,200 company Leuthold Small Cap universe over the S&P SmallCap 600 because we get almost a full additional decade of perspective. But figures for the latter shed extra light on just how significant the revaluation in Small Caps has been.
More Good News For Small Caps
Our call for improved relative performance in Small Caps received another boost in November, when VLT Momentum for the S&P SmallCap 600 confirmed the prior month’s “low-risk” BUY signal on the Russell 2000.
How Will It Be Remembered?
A way to gain perspective on the present is by trying to view it from the future. Ask yourself, “What are the signs of impending decline, now ignored by investors, that will one day be memorialized by the same investors as the most obvious in retrospect?”
VLT Complicates The Market Puzzle
At October’s close, a long-term BUY signal was triggered on the Russell 2000. The fact that some market segments are triggering “oversold BUYS” when blue chips are at record highs speaks volumes about the internal disparities that have developed during the last few years. The Russell BUY signal is not inconsistent with our belief that the action since the January 2018 peak remains part of a lengthy cyclical topping process.
Small Cap VLT BUY: Not Quite...
Small Caps came tantalizingly close to activating a major VLT BUY signal in September, with the Russell 2000 closing less than a half percent below the trigger level. A new bull signal from this indicator wouldn’t “fit” into our market and economic narrative, but we won’t sweep it under the rug if it occurs.
Worrisome Profitability Trend Among Small Cap Companies
Despite a historic economic expansion during the past decade, there is an ever-increasing number of companies that are finding profitability has become harder to achieve.
Small Caps: “What If?”
The Russell 2000 is the most important major index on the cusp of a new BUY signal. Our best guess is that Small Caps will still trend lower for now, creating a buying opportunity in the months ahead.
The Fed Subsidy Is Wearing Off
Earnings results for the second quarter have so far "beaten" expectations (as they always seem to), but that hasn’t changed the calculus for Small Cap companies. About one-third of them have negative earnings over the last twelve months.
The Small Cap Discount Deepens
Small Caps typically underperform during a bull market’s final phase, and our findings with respect to the Output Gap aid our understanding of that phenomenon.
Small Caps And The Recent “Rate Hike”
The 1999 leadership parallels we discussed in the latest Green Book remain intact—U.S. over foreign, Growth over Value, and Large over Small. Small Caps have given up most of the “beta bounce” enjoyed in the first two months off the December low, with one Small Cap measure—the Russell Microcap Index (the bottom 1000 of the Russell 2000)—undercutting last year’s relative strength low and those of 2011 and 2016.
VLT & Implications For Small Caps
For much of this decade, we had an allocation preference for Large Caps over Small Caps because of the considerable P/E premium commanded by the latter.
They Can’t Tax What’s Not Earned
With three quarters of a sharply lower corporate tax rate on the books, the median four-quarter trailing profit margin for both the S&P 500 and S&P MidCap 400 jumped to all-time records in the third quarter.
P/E Crash!!
While this year’s liquidity squeeze has yet to exact the toll we ultimately expect on the U.S. stock mar-ket, it has certainly contributed to a sharp compression in P/E multiples.
A Market Breadth Mystery
It’s difficult to knock a stock market in which Small Caps and major breadth measures are making frequent new highs, however, there are performance anomalies that suggest liquidity is no longer sufficient to “float all boats.” Recent underperformance of the Equal Weighted S&P 500 is a case in point, at the same time, the current dichotomy in market breadth pales in comparison to the 1999-2000 episode.
Try This On For Size
Today’s market is barbelled regarding company size, with the mega-cap Tech stocks and the S&P 600 Small Cap index both outperforming the middle of the S&P 500.
If You Think This Market’s Fishy, You’re Right
Tomorrow is the Minnesota season-opener for muskies, but the fanatics who chase them are likely disappointed that it comes a few days after an event that’s known to trigger these beasts: the full moon. The screenshot is from our $9.95 “iSolunar” iPhone app, and shows that Saturday merits only a “three fish” day (out of a possible “four fish”)—based on the moon’s fading illumination.
Breadth Is Great— Except Where It Matters The Most
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Last week’s piece challenged the now popular view that new highs for the Russell 2000 are a decisively bullish factor for the stock market in the near term. To our surprise, we found that market returns during periods of well-defined Small Cap leadership are significantly lower than when Smalls are laggards.
Is Small Cap Leadership Bullish?
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The Russell 2000 closed above its January 26th high on Wednesday, and well beforehand bulls had seized upon the secondary stocks’ leadership as evidence that all is right again with both the U.S. economy and stock market...
Small Caps Out Of “Phase?”
If one manipulates the data correctly, one can make the size effect—whereby Small Caps earn excess returns over the long pull—look instead like a beta effect.
Leverage Factor: A Tailwind For High Quality Stocks?
Following 2016 underperformance, High Quality stocks eked out an advantage over Low Quality stocks to begin 2017 (+5.3% versus +2.1%, respectively). Yet, the “Junk Rally” trend seems difficult to reverse.
Small Cap Seasonality
We’ve seen several pundits’ analyses of the “Sell In May” phenomenon of late, but none of them has addressed the most salient feature of this anomaly, which is that it’s historically been a predominantly Small Cap phenomenon.