Best Performing Small-Cap Stocks In 2018

Summary

• After a strong start to the year, small-cap stocks dramatically underperformed over the past several months, producing their worst annual return since the financial crisis.
• Despite this negative performance, a segment of the small cap universe did quite well.
• This article details the best performing 50 stocks in the S&P SmallCap 600 Index.

Even with small-cap stocks producing their worst returns since 2008, a small contingent of small-cap stocks posted strong returns in the past year. Roughly one-third of the S&P Smallcap 600 Index (NYSEARCA:IJR) posted positive returns with a noticeable skew to the return distribution of the far right of the graph below.

From the table below, you can see that the top 49 performing small-cap stocks in the S&P Smallcap 600 Index posted total returns north of 40%.

The leaders list was dominated by healthcare with 32% of the capitalization of the leaders list in that sector, roughly 3x the weight in the small-cap index. Fourteen of the fifty companies on the leaders list were in the healthcare sector. Consumer stocks in both discretionary and staples were also over-represented on the leaders list.

Earnings were more commonly positive on the leaders list than the accompanying article featuring the laggards list, although some very high multiples on this leaders list makes the average multiple less meaningful. Assessing balance sheets will be important in the small-cap space for investors picking specific stocks. While a profitability inclusion rule gives the S&P Smallcap 600 a positive quality bias against the more popular Russell 2000 (IWM), the left tail of the return distribution of the S&P 600 was still dark. Not all constituents will make it through the cycle. This article shows that favorable stock selection can drive meaningful gains even in down years for the market. For those wanting simple broad exposure to an equity asset class that has been under pressure in recent months, tilts towards diversified value (VBR), low volatility (XSLV), or dividend growth (SMDV) may be desirable.

Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties, and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon.

Analyst’s Disclosure: I am/we are long IJR, XSLV, SMDV, VBR. 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.