Small Caps Show Lost Benefit of Beating Estimates: Chart of the Day
Beating earnings estimates isn’t enough to enable smaller U.S. companies to sustain stock-market gains these days, according to Steven G. DeSanctis, a strategist at Bank of America Merrill Lynch.
The CHART OF THE DAY shows this by tracking the average relative performance of so-called small caps whose profits were higher than analysts’ projections, according to data compiled by Merrill Lynch. The figures cover the 20 trading days after each quarterly report and use the Russell 2000 Index, with a median market capitalization of $411 million, as a benchmark.
Last quarter was the second since 2002 in which small-cap stocks fared worse on average, as the chart shows. They trailed by an average of 0.6 percentage point. The first occurred in the same period of last year, when the shortfall was 1.3 points.
“There is very little differentiation” between companies that exceed estimates and those that fall short, DeSanctis wrote in an Aug. 27 report containing the data. This helps explain why money managers who rely on stock picking “are having a tougher time beating their respective indexes,” he added.
Smaller companies whose earnings failed to meet projections last quarter also lagged the index in the next 20 trading days, the data showed. The average gap was 4.2 points.
For shorter time periods, small caps whose earnings beat estimates sustained a track record of outperforming the Russell 2000, according to Merrill Lynch’s data. They fared better by an average of 1.8 points for one day and 1.7 points for five days.
(To save a copy of the chart, click here.)
To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net
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