More Upside In Small Caps

Jun. 14, 2018 11:13 AM ETNVEE, CTRL, NMIH2 Comments

Summary

  • Unique advantages of small caps now.
  • Impact of consumer confidence on small caps.
  • Three of our most timely small cap ideas.

Does the small cap rally have more room to run?

In this article, we discuss the reasoning for the outperformance of small cap stocks versus large cap stocks and why small cap stocks have more room to grow.

SmallCap Stocks (IWM) vs. Large Cap Stocks (SPY)

International Current Events Have Less of an Impact on Small Cap Stocks

In general, small cap stocks are more U.S.-centric because they do not have the resources to sell their products internationally. Similarly, the products of small cap companies may not have the same demand overseas, thus small cap companies are often times limited to sales in the U.S. only. According to data from FactSet, U.S. revenue exposure for small cap stocks in the Russell 2000 is 79.4%, a substantial difference from the S&P's 69.7% domestic exposure and the Dow's 61.7%. Thus, in times of international turmoil, small cap stocks can be seen as more of a safe haven from geopolitical concerns, currency fluctuations, and tariff issues than large cap stocks.

Furthermore, since small cap stocks are, in general, less exposed to foreign markets as compared to large cap stocks, small cap stocks should be less exposed to currency fluctuations as well. Recently, the dollar has been strengthening relative to other currencies, hurting profitability for large cap stocks that have a large foreign presence. Investors may view small cap stocks more favorably than large cap stocks because small cap stocks do not face exchange rate risk as much as large cap stocks.

The recent trade wars with China may have scared investors away from large cap stocks that are internationally exposed. Small cap stocks are, in general, more insulated from trade disputes because they are less exposed to other countries. Investors may be more enthusiastic about small cap stocks over large cap stocks because small cap stocks do

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This article was written by

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Singular Research aims to be a trusted supplier of independent research on micro/small cap companies. We provide initiation reports and quarterly updates on roughly 40 uncovered companies. We cover growth and value style equity ideas leveraging the extensive experience and knowledge of our in house staff of over 6 CFA's. Award winning original research with a following of over 105 institutional clients with over $60 billion in assets under mgmt. Singular is closely associated with the existing author Cook Capital Management.

Disclosure: I am/we are long NMIH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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