Some of the smallest companies in the market are making a big return.
In fact, at their current pace, small cap stocks could have another incredible year.
At the moment, they’re outperforming the market. With the S&P 500 up just 0.46% and the NASDAQ in negative territory since the start of June, the Russell 2000 is up 2%, and iShares Russell 2000 Index ETF (IWM) is up 4%.
Granted, much of that outperformance came as a result of a nasty tech sector decline.
- Facebook fell from $156 to $148
- Amazon.com fell from $1,012 to $953
- Alphabet fell from $964 to $898
- Microsoft fell from $71 to $68
- Apple fell from $152 to $143
In fact, Facebook Apple, Alphabet, Microsoft and Amazon lost $97.5 billion of value in early June on fears of overvaluation, as Goldman Sachs warned that momentum “built a valuation air pocket.”
According to the New York Post, Goldman Sachs “cautioned that the market’s over-reliance on FAAMG for growth and appreciation ‘has created positioning extremes, factor crowding and difficult-to-decipher risk narratives.’”
But that isn’t the only catalyst causing small caps to outperform blue chips.
Analysts argue that small cap stocks should perform better in the current market environment of rising interest rates and on a higher potential for increased market volatility, given geopolitical risks, such as issues with North Korea, the Middle East, and elections.
Geopolitical risks have little effect because most small cap stocks generate their revenues from the U.S. domestic market, which has shown solid signs of strength in recent months. Most have no ties to international markets so the strength of the US dollar versus other currencies doesn’t impact them.
For example, in the June issue of The Cheap Investor, we recommended Marati Therapeutics (MRTX) at $3.30. It moved up 27% to a high of $4.20. In the July issue, we recommended Halcon Resources (HK) at $3.79. It hit a high of $4.93 or +30%.
Even hedge funds are rotating back to small cap stocks these days.
Over the last two weeks, hedge funds went from being the most bearish on the Russell 2000 futures to the most bullish. It’s the biggest “about-face on record, according to Commodity Futures Commission data, “ as reported by Bloomberg.
Historically, small cap stocks have a tendency to outperform larger cap stocks, and that is why The Cheap Investor is so focused on the sector.