{"id":76658,"date":"2015-08-11T04:47:47","date_gmt":"2015-08-11T08:47:47","guid":{"rendered":"http:\/\/countingpips.com\/?p=76658"},"modified":"2015-08-11T10:31:45","modified_gmt":"2015-08-11T14:31:45","slug":"three-reasons-to-buy-small-cap-stocks-now","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex\/2015\/08\/three-reasons-to-buy-small-cap-stocks-now\/","title":{"rendered":"Three Reasons to Buy Small-Cap Stocks Now"},"content":{"rendered":"
August 11, 2015<\/div>
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By WallStreetDaily.com<\/u><\/a> \"08-11<\/p>\n

By Louis Basenese<\/a>, Chief Technology Analyst <\/em><\/p>\n

One month ago, I predicted that small-cap stocks were \u201cpoised to rally<\/a>.\u201d<\/p>\n

I cited the easing of the Greek crisis and the fact that small-cap companies derive most of their revenue from the United States (and therefore aren\u2019t as exposed to international troubles) as key reasons.<\/p>\n

Well, since the start of July, the small-cap Russell 2000 Index is down 3%, versus a 1% decline for the S&P 500.<\/p>\n

So was I wrong or just too early?<\/p>

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I\u2019m not ready to dig into a slice of humble pie yet.<\/p>\n

I still believe the Russell 2000\u2019s all-time intraday high of 1,296, hit on June 23, won\u2019t be the last. Indeed, the stage is<\/em> set for small caps to shine again. Here\u2019s why\u2026<\/p>\n

The Dog Days of Summer<\/h2>\n

One reason why a small-cap rally is taking longer than expected to kick in can be attributed to a seasonal slowdown for the stock market in general.<\/p>\n

Trading volume is traditionally lightest during the summer months. In fact, over the last 15 years, trading volume in July and August on major U.S. exchanges has declined between 5% and 10%, according to Credit Suisse. Heck, last August, we saw a slump of over 15%.<\/p>\n

This isn\u2019t just a U.S. phenomenon, either. It\u2019s global.<\/p>\n

Take London, for example. Since 1999, August trading volume on the FTSE 100 has tumbled by an average of 50%.<\/p>\n

The culprit? Vacation.<\/p>\n

While they\u2019re out of town, institutional investors are frequently away from their trading screens, which keeps them out of the market.<\/p>\n

Meanwhile, the guys who are working don\u2019t want to be the only investors, so they stay out of the market, too.<\/p>\n

\u201cAs volumes are usually lighter in the summer months, you don\u2019t want to be caught in a stock with light volume,\u201d says JC O\u2019Hara, Chief Market Technician at FBN Securities.<\/p>\n

The good news? The situation is temporary.<\/p>\n

When everyone\u2019s back, small caps \u201cstart outperforming again,\u201d says O\u2019Hara.<\/p>\n

So we\u2019ve got that going for us. But it\u2019s not the only thing\u2026<\/p>\n

GDP Rebound Ahead<\/h2>\n

Aside from buyers returning imminently, the stage is set for small-cap stocks to thrive because of U.S. GDP growth.<\/p>\n

As you know, the U.S. economy put in a sluggish performance in the first quarter of the year, with growth trickling in at a measly 0.6%.<\/p>\n

But it rebounded well in the second quarter, with GDP growth hitting 2.3%. And based on that, the consensus is for the economy to accelerate over the second half of the year.<\/p>\n

This bodes well for U.S. small-cap companies, given that the average firm counts on the domestic market for 80% or more of its annual sales.<\/p>\n

With an economic uptick coming, and small-cap businesses highly levered to the U.S. economy, their fortunes \u2013 and, in turn, their share prices \u2013 should rise accordingly.<\/p>\n

So why should you care about any of this? Well, it couldn\u2019t be more straightforward\u2026<\/p>\n

Three Reasons Why I Always Bet Big on Small Caps<\/h2>\n

My personal investment portfolio is always<\/em> overweighted to small caps. Why?<\/p>\n

Reason #1: Maximum Inefficiency<\/strong><\/p>\n

Forget what they tell you in academia. The efficient market hypothesis<\/a> is total junk science. Especially when it comes to small caps.<\/p>\n

In fact, the largest amount of inefficiency<\/em> exists in small caps. That\u2019s because 80% of Wall Street analysts spend all of their time researching large-cap companies. They almost completely neglect small caps.<\/p>\n

Case in point: At any given time, the average large-cap company has almost two dozen analysts covering it. Meanwhile, the average small cap only has about five. And at least 20% of small caps have absolutely no<\/em> analyst coverage.<\/p>\n

If we\u2019re willing to take the time to do real due diligence, we can gain an informational advantage and leverage it for above-average profits.<\/p>\n

Reason #2: Maximum Opportunity<\/strong><\/p>\n

When it comes to finding the most attractive investments, it helps to have more choices. And simply put, there are way more small caps than other companies.<\/p>\n

At the end of the second quarter, there were 3,951 U.S. small-cap stocks, defined by market capitalizations of $2 billion or less. That compares to 1,420 mid- and large-cap stocks.<\/p>\n

\"The<\/p>\n

Reason #3: Maximum Performance<\/strong><\/p>\n

The last reason why I always overweight small caps in my portfolio is the most important: Because they historically perform best!<\/p>\n

Multiple studies dating back to 1925 confirm that small caps outperform large caps.<\/p>\n

The small-cap advantage applies across geographies, too, as evidenced by this recent research from Lazard Asset Management<\/a>.<\/p>\n

The greater returns of small caps over large caps are too consistent to be dismissed. The outperformance ranges from 2% to 5% per year. Compounded over time, that\u2019s significant.<\/p>\n

But it\u2019s not just relative performance. Absolute returns for small caps also top the charts.<\/p>\n

\"More<\/p>\n

In the modern era, small caps have delivered positive returns 87% of the time, based on three-year average annual total returns. And they\u2019ve delivered double-digit returns 64% of the time.<\/p>\n

Bottom line: Betting big on small caps pays off because they offer the best risk versus reward potential to everyday investors. I fully expect that to be the case in the months ahead. Invest accordingly.<\/p>\n

Ahead of the tape,<\/p>\n

Louis Basenese<\/p>\n

The post Three Reasons to Buy Small-Cap Stocks Now<\/a> appeared first on Wall Street Daily<\/a>.<\/p>\n

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 <\/p>\n","protected":false},"excerpt":{"rendered":"

By WallStreetDaily.com By Louis Basenese, Chief Technology Analyst One month ago, I predicted that small-cap stocks were \u201cpoised to rally.\u201d I cited the easing of the Greek crisis and the fact that small-cap companies derive most of their revenue from the United States (and therefore aren\u2019t as exposed to international troubles) as key reasons. Well, […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-76658","post","type-post","status-publish","format-standard","hentry","no-post-thumbnail"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/76658","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/comments?post=76658"}],"version-history":[{"count":3,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/76658\/revisions"}],"predecessor-version":[{"id":76695,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/posts\/76658\/revisions\/76695"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/media?parent=76658"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/categories?post=76658"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex\/wp-json\/wp\/v2\/tags?post=76658"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}