Small-Cap Stocks Poised For Big Comeback
Consider the upbeat scenario: An improved economy reinvigorates consumers, who run out to buy pairs of new shoes.
While that is an oversimplified example of cause and effect, it depicts the basic logic behind some of the good prospects for small-cap stocks. They were hammered in 2008, regained momentum in 2009 and show promise for 2010 based on hopes of a better economy.
Small-cap value funds are up 64 percent over the past 12 months and small-cap growth funds up 52 percent, according to
One company beneficiary: Popular casual footwear company
Flexible in adapting to trends, Skechers is expected to pick up sales and profits in an economic recovery because its brand identity is so strong. Its wide variety of shoe styles are sold primarily to teen-agers and young adults through department stores, specialty stores, online and more than 240 company-operated stores.
"The current phase in small-cap stocks is earnings driven," explained
Another small-cap favorite of Collins is data storage firm
"Information technology is a good sector because so much equipment is so ancient by now," said Collins. "That's why we anticipate a nice pick-up in capital spending for it."
Other small-cap companies Collins considers poised for further success are
"When earnings are driving these stocks, I think that you will find that small-cap growth stocks will outperform small-cap value stocks," predicted Collins.
Nobody should be the least bit surprised that small-cap stocks have been on the rise, according to some expert investors.
Going into recession, larger companies reduce their inventory and scale down, which immediately hurts smaller companies that typically are their suppliers. Credit tightens and the smaller companies have difficulty getting money as well. But when larger companies rebuild their inventories, as they did last year, they go first to their suppliers and that gives a boost to small-company stocks.
"It's a well-known fact that small-cap stocks tend to underperform when going into a recessionary period and then tend to lead during a recovery," said
One of that fund's most significant holdings is
Another major stock holding is
To some, the prospect of near-term economic improvement isn't the only reason to be in small-cap stocks.
"Regardless of the economic climate, investors should have small caps in their portfolios for their long-term investment strategy," believes
When buying small-cap stocks, Fisher prefers to go with asset classes in exchange-traded funds rather than try to pick individual stocks.
He favors the iShares Russell Microcap Index (IWC), which tracks the Russell Microcap Index that includes the bottom 1,000 stocks in the small-cap Russell 2000 Index plus an additional 1,000 firms not included in the index. Over time, studies have shown that micro-cap stocks can outperform larger stocks and have little correlation to other asset classes.
"If the markets are good at pricing risk correctly, then investors will benefit by owning small-cap stocks in their portfolios," concluded Fisher. "I'm sort of indifferent to the widget that is used."
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Investing - Small-Cap Stocks Poised For Big Comeback
(c) 2010 Andrew Leckey