Think Small To Win Big

The S&P 500 is having a good year, up around 10% already. But you know what? Small-caps are going up faster. And for real outperformance, you want to think even smaller … with micro-caps.

In fact, you might say that to win big, you should think small.

Here’s a performance chart of the S&P 500 versus the iShares Russell 2000 ETF (NYSE: IWM), which tracks small-caps, and the iShares Micro-Cap ETF (NYSE: IWC), which holds a basket of stocks with market caps under $300 million.


 

You can see that since the start of the year, the S&P 500 is up 9.64%. Not bad, considering it’s only April. Small-caps are doing better at 13.46%. But for real outperformance, micro-caps have delivered a 24.22% return. That’s more than DOUBLE the S&P 500! Sweet!

Now, here’s the interesting thing: Historically, this isn’t unusual. Since the mid-1920s, according to data from Dartmouth finance professor Kenneth R. French, the 10% of stocks with the smallest market caps have beaten the largest 10% of stocks by 2.4 percentage points per year.

However — plot twist! The last two decades have seen that long-term rule thrown out the window. Mega-caps have trounced small-caps and micro-caps over the last 20 years.

So what’s going on? Is this a deviation from a new norm or a return to the old normal?

Here’s my take:

Big Value in Small Stocks

The valuations in some of the big headlines stocks — Apple Inc. (Nasdaq: AAPL), Alphabet Inc. (Nasdaq: GOOGL), Tesla, Inc. (Nasdaq: TSLA) and so on — would give a Sherpa nosebleeds. So, a lot of money on Wall Street is looking for some kind of value. And traditionally, small stocks represent better values.

U.S. Boom Favors Small Companies

On Thursday, I told you how the world is roaring out of the pandemic-induced recession, with central banks around the world raising estimates for growth. That’s the good news. The better news is that the U.S. is leading the pack. Sure, China and India lead the pack, with projections for 8.4% and 12.5% growth, respectively. But the U.S., with a forecast of 6.4% growth in 2021, leads the developed world. The Eurozone is projected to grow 4.4% … Canada, 5% … the U.K., 5.3%.

Why is this important? Domestic growth tends to benefit smaller companies. And the fact that the U.S. is expected to outperform other developed nations plays to the strengths of small-caps and micro-caps.

Success Draws Speculators

Money attracts money. And the success we are seeing in micro-caps right now is definitely putting them on the radar of Wall Street speculators. There is an ocean of free money sloshing around Wall Street lately. Rates remain ultra-low. As long as that goes on, there will be more money chasing stocks, especially micro-caps.

Those are my three top reasons why micro-caps could continue to outperform in 2021. There could be others.

If you want to play this trend, consider looking at IWC.

In other words, think small to potentially win big.

All the best,

Sean

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