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Why Small Caps Are Greatly Favored In 2018

|Includes: Endocyte, Inc. (ECYT), FMSA, POLA

The Russell 2000 is hitting record highs, as small caps continue to rally.

In fact, it’s now up 5.1% for the year, as compared to the 2.5% returns on the S&P 500, and the scant 1% move on the Dow Jones Industrials.

“When the economy is stronger than normal, small caps do better,” said Ryan Detrick, senior market strategist for LPL Financial, as quoted by Reuters. “With a good economy like we’ve seen happening this year, we fully expect this to keep playing out in the second half of the year.”

Besides the expanding U.S. economy, corporate tax cuts have played a part, too. In the past, small caps were forced to pay higher tax rates than their bigger rivals, which meant that in many cases, they had more to gain from the tax cut plans.

The domestic focus of many smaller companies makes them a bit less vulnerable to overseas issues, such as trade wars between the U.S. and China, too. Also weighing on bigger stocks is the strength of the U.S. dollar, which recently hit a four-month high.

According to Market Watch:

“Small-cap stocks tend to be more U.S.-focused in terms of their geographic footprint and where they derive their revenue. As such, they are seen as insulated from all manner of international headwinds, including trade policy and other geopolitical tensions. Furthermore, they are not suffering from recent strength in the dollar, which typically emerges as a headwind for large-cap companies by eroding their overseas profits.”

The small cap rally has been great news for The Cheap Investor portfolio, too.

In fact, the rally prodded many of our recommendations significantly higher.

  • Endocyte Inc. (NASDAQ:ECYT) for example ran from an entry of $1.43 to $12.48
  • Polar Power Inc. (NASDAQ:POLA) popped from $4.99 to $6.07
  • FMSA Holdings Inc. (NYSE:FMSA) rocketed from $2.57 to $6.36

After 36+ years of small cap research, we can tell you that one of the worst things you can do is avoid quality small-cap stocks. We’ve found them to be some of the most explosive investments around. That’s why we’ll continue recommending them for another 36+ years.