I must admit, I’ve been a bit if a Stock Racist lately.
As I am a fiduciary managing OPM (Other People’s Money) this should come as no surprise. A casual glance at my top 20 equity positions would make you think that I was prejudiced against small companies, especially early-stage ones without earnings. And to a certain extent, this is true.
My stock predilections are toward Large Cap Growth, Large Cap Value and my personal favorite pumpkin patch to pick from, Mid Cap Growth. After ten years on The Street, I’ve come to appreciate the following about my three favorite areas of investment:
- Large Cap Growth stocks can continue to grow for a long time (I mean, $IBM anyone?) and even offer small cap-like returns once in a while. Take away the Y Axis on a chart of Apple ($AAPL) and the price action would make any microcap Chinese Biotech-Steel Mill investor very proud.
- Large Cap Value stocks offer me the ability to add ballast to a portfolio without using fixed income. But because bank stocks no longer offer any kind of ballast whatsoever and I view the tobacco industry as being in a secular decline, I’ve done much less individual stock-picking in this arena of late. Rather, I’ve begun using a lot more fundamentally-weighted index ETFs (the Little Lebowski Dividend Achievers, man) for my value/dividend holdings, I really like how they quantitatively screen out the names with weaker or cut-down payouts for me. Life is short, after all.
- Mid Cap Growth is my thing. I am not an expert across markets, but I am really good at picking the mid-sized growth stories that could one day become large. I’ve done it with techs, health care, energy, financials, retailers and so many others again and again.
But putting all that aside, there is something to be said for owning a little rocket ship or two. Sure, the man on TV dismisses them as “junk” but let’s keep in mind that in a well managed account there’s room for all classes.
My friend ZorTrades reminds us not to hate on these names as they are sometimes the standouts, the hottest game in town. He’s taken a look at the best-performing stocks of the year so far and deduced the following:
- 9 out of the 10 stocks still have a market cap of less than 1 billion dollars, that puts them in the small cap category.
- All 10 stocks still trade under 30 dollars a share
- 7 out of the 10 still trade under 15 dollars a share
- 9 out of the 10 started the year under 15 dollars a share
- 8 out of the 10 are U.S based companies
- 6 out of the 10 are technology stocks
- 5 out of the 10 according to FINVIZ had negative EPS this year
- 7 out 10 have a negative RETURN ON EQUITY
- 8 out of the 10 have NEGATIVE PROFIT MARGINS
- None of them pay a dividend
With proper risk management, there’s no reason to be racist against small caps. In fact, some of my biggest winners (and yours also, I bet) during this two year rally have been stocks they’ve dismissed as “junk”. My earlier roots in the business had me speculating on the little guys as a matter of course. I’d enjoyed the victories but despised the failures much more – so this part of my repertoire has been de-emphasized for a long time.
Zor’s post reminded me that small cap movers should never be ignored entirely, especially in markets like these.