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- Microcap shares perform just as well as some investors’ favorite, but at much cheaper ratings, James Paulsen, chief investment strategist at The Leuthold Group, noted in a note.
- The “powerful microcaps” outperformed their tech peers and even the S&P 500’s Growth Index, despite growth names most likely winning after a bearish tumble.
- The smallest of the small shares also earned with record-low valuations relative to the S&P 500, Paulsen noted.
- As microcapsules continue to grow with older peers, “investors should consider diversifying some of their S&P 500 allocation,” the strategist said.
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One unexpected group of stocks performs about as much as tech tech giants, and investors can still get in at a cheap level, according to one top strategist.
Investors have largely neglected microcaps – the smallest of the small public companies – since indices in late March. That trend is not something new. After such a steep crash, investors typically stack up in big growth names and bet on their healthy cash flow to boost their chances of an economic downturn.
However, the market’s smallest shares perform almost as well as the S&P 500 and bend the historical trend, said James Paulsen, chief investment strategist at The Leuthold Group, in a note to clients. The “powerful microcaps” significantly outperformed the Russell 2000 Small Cap Index from the peak of February 19 to August 11 of the market, the strategist found. The subset only underperformed the S&P 500 by 2%.
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However, the microtransactions for microcaps struck their older peers at their own game, Paulsen said. The Russell Microcap Growth Index jumped 7.2% over the same period, outperforming the S&P 500 Growth Index by 6.7%. Growth shares of small caps recorded a 0.8% loss.
At the other end of the stock spectrum, microtaps were performed in line with the S&P 500 Value Index. Both meters beat the Russell 2000 Small Cap Value Index.
The Leuthold Group
Interest from investors in tech stocks improved microcaps even more than it did the most popular names. The Russell Microcap Technology Index gained 11.1% through the market rally, beating the S&P 500 Tech Index climb of 8.6%.
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“A lot of the focus this year has been on AAPL, GOOG, NFLX, FB, and TSLA. But, have you heard of OSTK, SRNE, APPS, or MAXR?” Paulsen said. “If the Micros can really stay with the Bigs, investors need to consider diversifying some of their S&P 500 allocation.”
Paulsen states that it is not too late to do so. At the end of 2018, the rating of microcaps relative to the S&P 500 was roughly the same as ‘relative rating of small caps’ at around 0.75.
However, the two have disappeared from the entire pandemic. While the rating of small caps against the S&P 500 is just above 0.5, the rating of microcaps this year has fueled a record low of 0.3. That level implies historical goodwill in the rising stocks and sets them up for greater gains as investors discover their value.
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If micro-sites continue to grow at the same rate as the market’s most favored growth names, “they will eventually be discovered,” Paulsen said.
“Who knows, maybe these Mighty Macros will get an acronym someday?” he added.
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