Daily Management Review

Gems Among Unloved Small-Caps Sought By Investors in the U.S.


08/27/2017




Gems Among Unloved Small-Caps Sought By Investors in the U.S.
Small cap investors may be left scrambling for quality names and more resilient sectors as U.S. small-cap stocks may face more selling pressure because they are highly sensitive to the fate of President Donald Trump’s policy ambitions.
 
Due to rising doubts that Trump can deliver on pro-business promises such as tax cuts, small-caps have fallen recently – these are more reliant on U.S. policy and economic conditions than are large multinationals.
 
While the Russell 2000 , which includes smaller firms, is up 1.4 percent versus the S&P 500’s 9.2 percent rise, the S&P 600 index of smaller companies .SPCY has fallen 1.4 percent in 2017 after outperforming in late 2016 after Trump’s election.
 
Small-cap investors are carefully picking their steps with Russell 2000 and S&P 600 multiples above historical averages
 
“There’s a lot of value in small-cap land if you can look through the rubble,” said St. Denis Villere III, portfolio manager at Villere & Co in New Orleans, LA.
 
Citing a patchier earnings outlook than for multinationals as well as doubts about Trump’s agenda, some strategists are bearish on the small-cap sector as a whole.
 
And high volatility in coming months as U.S. lawmakers debate controversial issues such as the debt ceiling mat be faced by small-cap indexes, which are typically more volatile than the S&P 500.
 
Smaller companies are “much more at risk than the large and more internationally exposed companies,” according to Michael Purves, Chief Global Strategist at Weeden & Co, who cited concerns about the lack of a “cohesive mood” in Washington.
 
While the Russell 2000 forward P/E is 25.4 compared with its 21.3 historical average, the S&P 600 price/earnings ratio is currently 19.7 compared with its long-term average of 17.3.
 
the Russell 2000 could be brought below where it was before Trump’s Nov. 8 election as valuations are high and “volatility is on the rise” as it could fall 10 percent or more, says Jefferies equity strategist Steven DeSanctis.
 
Specific small-cap sectors and stocks that still look cheap but have strong growth prospects are attracting the attention of investors due to the bearishness.
 
For example, while utilities and consumer staples stocks are out of favor among many investors, smaller financial and information technology stocks are strong value contenders.
 
“Given that the economy is better, we’re more cyclical biased. That leads us to companies from technology to industrials,” said Michael Corbett, chief investment officer at Perritt Capital Management in Chicago, who focuses on small-caps. “Valuations within staples look expensive today, whether it’s food or utilities.”
 
Due to its exposure to strong overseas growth, Jefferies’ DeSanctis is bullish on the technology sector. While being wary of retailers, real estate, utilities and materials, he also likes financials and travel and leisure bets but is wary of retailers, real estate, utilities and materials.
 
“Financials are a longer-term trend. This is not a thing that’s six or 12 months. It’s longer-lasting outperformance,” he said, citing higher rates and slow deregulation for banks.
 
Villere likes technology and some consumer companies but is wary of utilities and energy companies.
 
(Source:www.reuters.com) 






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