Size doesn’t matter when it comes to US stocks, because investors seem to prefer small companies over big ones in 2018.
That’s a sign of the continued strength of America’s economy as small-caps tend to move earlier than later stocks whether up or down.
The Russell 2000, an index that includes shares of mostly smaller US companies, is up nearly 7% this year and is trading at an all-time high this week.
The Dow and S&P 500, both of which are home for industry giants like Apple, Disney, Coca-Cola and Boeing are up just 1% and 2% respectively. They are both still trading about 5% below their record highs.
To start, many smaller businesses in the Russell 2000 are growing their profits at a faster rate than the giants of the Dow and S&P 500.
Earnings for the Russell 2000 companies are expected to increase more than 40% this year and another 23% in 2019. That’s much better than analysts’ forecasts of a 20% jump in earnings for S&P 500 companies this year and 10% next year.
We see this continuing throughout the rest of 2018. Investors would be wise to consider smaller stocks as they tend to move higher faster when things are going well and lead the overall markets.
Here’s a thing I like about small companies. In many cases, the people who run them aren’t just executives — they’re proprietors who took massive risks to build what exists today and who run themselves ragged to make sure that what does exist will be even better in the future. While I’ve met hundreds of extremely competent, dedicated executives over the years, there’s just something different about the person who scratch-built a company. To him or her, there is no such thing as a better employment offer around the bend. There’s no such thing as down time, or weekends, or even hobbies. This company is it. There’s no pushing ideas through some big committee. That person is the committee.
Maybe those kinds of companies sound a little risky to you. After all, doesn’t classic finance hold that, all else being equal, the smaller a company is, the riskier it is? Well, yes, on a company-by-company basis, those with smaller market capitalizations are riskier in terms of volatility and potential for total loss.
I believe, all else being equal, that this is insane in the aggregate. There is no reason that a portfolio of well-researched, quality small-cap companies should be riskier than one consisting of large-cap companies.