small cap or large, in the US today?

I think today’s US stock market circumstances favor medium-sized companies over their larger brethren.

Several reasons:

–large stocks have outperformed smaller ones for the past several years

–historically, the relationship between PEs for large and smaller cap stocks is all over the map.  One reason for this is that large and small seem to take turns having multi-year runs as the focus of investor interest.  At present, there looks to me to be no overall price advantage for either group.  Not the most ringing endorsement for small, but at least valuations don’t appear stretched

–large stocks are more likely to have exposure to Europe, where currency weakness is wreaking havoc on the results in US dollars of operations there.  Smaller companies are more likely to be predominantly focused on the US, where growth is better –and just now reaching down to second-tier firms—and currency isn’t an issue

–brokerage house analysts, who are a notoriously bullish lot, have been reducing their earnings estimates for 2015 sharply, based on 4Q14 earnings reports and managements’ forward guidance.  Much of the decline is due either to energy or currency, where analysts should arguably have done a better job.  Still, the picture that’s emerging for 2015 from Wall Street is of flat-to-barely-up earnings per share for the year.  This implies to me that portfolio managers will be willing–eager, actually–to give a hearing to niche companies they haven’t needed to bother with until now–provided they can show, say, 10% eps growth.


As a result, in looking for new individual stocks, I’ve been shifting my eye toward smaller cap names (also toward te h, but that’s another post…).

One caveat:  my experience is that small cap is a catchbasin for a class of perennially weak companies that manage to stay in business, but who are unable/unwilling to create earnings growth.  These may also be highly illiquid.  These can be interesting targets for seasoned value investors with long investment horizons.  The rest of us should stay away.


One response

  1. Well I wish I had some good “Millennial” companies for you.

    Apple was the biggest play there. You’d see kids in the worst of the recession with iphones and macbooks. Affordable luxury.

    Whole Foods was good for a while as well.

    (neither small cap)

    Lululemon was a good play. Again a misunderstood product. Keeping it away from chubbies kept the brand as exclusive. Losing that rapidly with new management. I also like Icebreaker in that space but not a public company. Moncler?

    The best was zeltiq, which I got into at 4 and sold at 7. Now 34?

    Some other boring small caps — Northern Tier Energy, Liquidity Services, Trevana. None of those are “Millennial”

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