Small Caps On Fire

| About: iShares Russell (IWM)

Summary

Select small caps under Wall Street radar show exciting returns in 2016.

Keys that lead to superior returns.

Can active management beat passive in small caps ?

Small Caps on Fire

Since the election of Trump in November, small caps have led the market by a wide margin with a rally that has been broad based judging by the leading performance of the value line arithmetic index, which is a more equal weighted index. If the incoming administration stays true to its campaign platform, we would expect small caps to continue this outperformance. Corporate tax cuts, reductions in administrative and regulatory burdens and an uptick inflation all play to the advantage of small caps; when combined with a focus on domestic oriented businesses that lead job creation, should power continued alpha.

Our top-performing ideas in 2016 were led by healthcare and biotech companies with three top picks. REX American Resources (NYSE:REX) was our best call, starting the year trading at book value and soaring over 83% as oil prices turned around. Powered by better-than-expected earnings and increasing institutional ownership, REX has rewarded our clients with a 700% + return since we initiated coverage in 2010. During this period, Singular has been the sole, consistent research coverage due to lack of banking deals to entice Street coverage. Another case of consistent stable earnings growth and superior returns is embodied by Acme United (NYSEMKT:ACU) +47% and our first initiation, over 11 years ago, providing a reward of nearly 300% since we initiated coverage.

A trio of healthcare-related issues powered our core of our best calls, led by IRIDEX (NASDAQ:IRIX), with its laser technology-based treatment for glaucoma, up +56% followed by IntelGenx Technologies (OTCQX:IGXT) +50% with its novel proprietary oral drug delivery technologies, and newcomer Amyris (NASDAQ:AMRS) +49%, with this proprietary bioscience platform that cost effectively converts plant sugars into difficult-to-source materials in fragrance cosmetics and nutrition. We feel these three stocks could be in the early stages of exceptional multi-year outsized returns evidenced by their leadership and niche positions and lack of research coverage by the Street. Filling out our top performers are State National Companies (NASDAQ:SNC) a unique property-casualty insurance with innovative products and Kulicke and Soffa Industries (NASDAQ:KLIC), a semiconductor equipment manufacturing in the early stage of a fundamental turnaround posting 2016 returns of 36% and 35%, respectively.

We are encouraged by the signs of animal spirits re-emerging for 2017 and will continue searching high and low for these forgotten gems that don't need Wall Street some money. Thank you and stay tuned!

2016 Best Calls

REX

82.63%

IRIX

56.22%

IGXT

50.00%

AMRS

48.97%

ACU

46.85%

KLIC

36.67%

SNC

33.14%

Disclosure: I am/we are long AMRS, ACU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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