The Return on Small-Cap Stocks Since October: 31.9%
There are good reasons to be gung-ho over small caps. "Rising investor confidence means investors are willing to take more risk," says Jim Oberweis, president of Oberweis Asset Management. "That will lead to a continued, powerful rise for small-cap stocks." Oberweis says a rebounding U.S. economy benefits small caps, which have greater domestic exposure (and less exposure to Europe's problems) than larger companies. Declining interest rates, he says, means the value of high-growth companies (usually smaller companies) should rise faster than large caps. Net inflows into small-cap funds and exchange-traded funds surpassed $1.8 billion in February, according to Morningstar.
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Why It Matters
Since October 3, small caps, typically defined as companies with market values under $3 billion, have outperformed large caps -- those with market caps over $15 billion. The S&P Small Cap 600 Index gained almost 32 percent during that time, compared to the S&P 500, which rose almost 24 percent. In eight of the years from 2000 to 2010, small caps outperformed large-cap stocks. In recent weeks, however, small cap stocks have shown signs of weakness as they underperformed the S&P 500 by about 5 percent.
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What It Means for Your Portfolio
Large-cap bulls warn that recent small cap underperformance may signal slower times ahead. Small-cap earnings growth fell in the fourth quarter and estimates for 2012 are declining, according to a Bank of America report. Also, small caps look pricey. The S&P Small Cap 600 Index's trailing price-to-earnings multiple is over 21, while the S&P 500's price-earnings multiple hovers around 14. That ratio of 1.5 times is notably above its 10-year average of 1.2 times. While investors have been chasing small caps this year, it's worth noting that after pouring $6.7 billion into small cap funds in 2010, investors yanked $15.4 billion from them in 2011.
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