Are Small Caps the Place to be for the Next Decade ?
Tom Lee says small-cap stocks can outperform by 100% over the next couple of years on Trump policies.
Is this the time to position off the 200-day SMA before he takes office? $iShares Russell 2000 ETF(IWM)$
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While small caps have historically beaten large caps, the Russell 2000 has underperformed the $.SPX(.SPX)$ since 2014. Indeed, the S&P500 to Russell 2000 ratio has reached 3 standard deviations to the downside, sign of an extreme cheapness of small caps relative to large ones.
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After a decade of mega caps' overperformance, during which indexing has become meanstream (pushed by personal finance influencers), adopting another stance could seem counterproductive to many. But, looking at longer-term data (not only the past 10 years), large caps have provided an annual return of 9.9% against 13.1% for small caps (from 1926 to 2009, Source: Expected Returns).
This suggests that small caps offer over the long-term a better potential return than large ones, advocating for a small cap strategic allocation in any long-term equity investor's portfolio.
Then comes the question: Growth or Value?
The fact that small cap value have outfperformed small cap blend historically (14.8% VS 13.1% respectively), small cap growth have usually been source of deception with only 8.5% p.a.
How can your implement this in your portfolio?
Remember to pick stocks with low P/Es, low debt, and high ROIC, ideally in a positive momentum, in order to find quality small caps trading a bargain price while offering good earning growth potentials.
Passive investors who are looking for a way to get exposure to small cap value stocks could also simply buy an ETF replicating this strategy.
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