The iShares Russell 2000 ETF (IWM) tracks a basket of small-cap stocks including companies not typically part of large-cap broad market indexes like the S&P 500. Year to date, the ETF is up 15%, but still 10% below its all-time high set in August of 2018, which is in contrast to the S&P 500 and NASDAQ 100 that both rallied to make a new high this year. The under-performance over the past year, particularly since Q3 2018, is something of a curiosity considering apparently strong economic data from the U.S., with Q1 GDP growth confirmed at 3.2%, dovish Fed, and the thought that small-cap stocks typically have more concentrated exposure to continued positive domestic consumer fundamentals. This article looks at the trends in the underlying holdings of IWM, highlighting the top performers in the ETF.
I compiled a data-set presenting the stock price performance, growth figures, and trading-based valuation multiples for the 1,933 current holdings in IWM. 1,452 stocks (or 75% of the holdings) have a positive price performance this year with the average stock in that group up 26% YTD. On the other hand, the average performance of the stocks that are down is -17%. Digimarc Corp. (NASDAQ:DMRC) is the best-performing stock in the ETF this year, up a massive 310%, while Alta Mesa Resource (NASDAQ:AMR) with a market cap of just 35 million is the biggest loser, down 85% YTD.
Impressively, 29 stocks have doubled in value this year up and are up at least 100%. The list of the best-performing small-cap stocks this year is a diverse group across sectors, although represented by 11 biotech companies. These stocks generally have gained momentum on effectively blowout earnings reports or major news of a product or operational development.
My data shows that 734 stocks in the ETF were not profitable in the last fiscal year or otherwise reported negative earnings. Of the stocks that were profitable, the median price-to-earnings ratio is 17.7. Among stocks with published revenue estimates for the year ahead, median expected revenue growth is approximately about 5%. Among the top 20 holdings in terms of the IWM ETF weighting, the average forward PE ratio is 48x, while the price-to-sales ratio is 6x. This highlights the significant growth premium the market is assigning to what are potentially the "most important" small-cap stocks.
The table below presents the top 29 small-cap performers in IWM YTD 2019 as of May 15:
Selected Stock Commentary
Digimarc Corp., previously mentioned as the biggest winner this year, has a patented retail barcode solution that allows identification to be printed all over a product packaging invisible to the human eye. At checkout, an item can be scanned without thought to product orientation over, which speeds up the process. The company won a contract with Walmart (NYSE:WMT), and the result is evident in the stock price up 310% YTD.
Flotek Industries (FTK), a service provider for the oil and gas industry, doubled after announcing a sale of its chemicals business to Archer-Daniels-Midland Company (ADM). The stock is up 221% in 2019.
Roku (NASDAQ:ROKU) and Carvana (CVNA) have approached levels nearing large-cap territory with market values near $9.5 billion. ROKU reported what can only be described as blowout earnings and shareholders have been rewarded with the stock up 170% YTD. Carvana on the other hand largely defies logic as one of the most expensive stocks in the market in terms of valuation metrics based on significant losses while the market continues to be focused on its top-line growth. The company reported sales growth of 110% year over year with a loss of over $80 million for the quarter.
Pier 1 Imports (PIR) with a market cap of $74 million is up 184% in 2019, although the story remains largely negative as the retailer looks to close 45 of its 900+ stores. The stock is still down 60% over the past year with "vultures circling," as some believe the company is heading towards official bankruptcy and remains a highly speculative play.
Travelzoo (TZOO) is another notable winner this year, up 112%. The travel membership site reported something of an operational turnaround with higher earnings and membership growth in Q1. Management has rolled out a number of new products and highlighted the earnings presentation by saying North America revenues accelerated at the fastest pace in four years. Indeed that's the type of comment by management that will push the stock higher.
The under-performance of small caps relative to large caps over the last year is likely related to the growth-factor-tilt which lost momentum since Q4 of 2018 with rolled back expectations and higher risk aversion. A case can be made that too many small caps that lead the market in 2018 were simply too expensive with stretched valuations. I believe given the speculative nature of many small-cap names in general, the under-performance should continue in the near term as higher-quality large-cap names offer higher yields and less risk.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.