Sometimes, size does matter.
For quite some time, small cap stocks languished thanks to a number of factors, including a crash in commodities. Then, for most of 2016, traders ignored them.
But since the election, small caps have become one of the biggest sector winners on the market.
That’s likely to continue well into 2017 with Donald Trump in the White House.
Sure, the common fear is that smaller cap companies are far more volatile, making them riskier. But the reality is that that some of them have been generating above-market returns with lower risk.
As a result of unstable global economic conditions, U.S. small caps are now being recognized as the sweet spot for safe investment allocation. Also, with most of Trump’s economic policies likely to focus on the domestic economy, small caps are likely to benefit even more.
Meanwhile, large cap stocks with an international footprint could be negatively impacted by attempts to renegotiate global trade agreements. Some could even find themselves subject to penalties if new laws are enacted to discourage business outside of the U.S.
Trump has already threatened tariffs on companies that move work abroad, for example.
Proposed infrastructure spending, fewer onerous regulations for businesses, and lower tax rates could send many small caps higher, too.
Many funds and institutional investors are showing interest in small caps, as well.
In fact, according to Morningstar, SDPR S&P 500 saw inflows of $7.5 million in November. But in second place was the iShares Russell 2000 ETF with an inflow of $6.2 million.
That’s a bullish sign that investors are excited about smaller companies.
As we begin 2017, there are a number of small cap stocks that still look attractive.
Construction consulting firm, Hill International (HIL) could be poised for a great year. After recommending the stock at $3.27 in the December 2015 issue of The Cheap Investor, it recently hit a high of $5.68 for a potential gain of 74%.
What’s interesting is the company just received a $35 million contract from Santa Clara Transportation Authority, as well as an $8 million contract to manage the reconstruction of the Pennsylvania Turnpike. Trump’s plans to upgrade the nation’s infrastructure, could be a real boon for the company as well.
Global satellite company Iridium Communications (IRDM) was recommended in the October 2015 issue at $6.10. It recently hit a high of $11.30 for a potential gain of 85%.
IRDM has used Space X to help it launch its Iridium NEXT program, which involves a network of satellites to offer better quality for its global satellite connectivity networks.
On January 14, Space X successfully launched 10 commercial satellites into orbit, and safely landed the reusable part of its rocket as well. That is great news for the company.
We strongly believe the small cap rally has only just begun. Sit tight. We have several new recommendations for the February 2017 issue of The Cheap Investor.