The other day, a headline in a financial publication caught my attention. “Small Is No Longer Beautiful,” it read.
I was intrigued. I knew all about the strength in small-cap stocks this past year and how their strong post-election rally started to fizzle in December.
But would I go so far as to predict that these stocks have totally lost their appeal compared with their large and mega-cap peers?
I don’t think so.
And it might also be true that the index was getting a little ahead of itself, as suggested by its December pause.
Russell 2000 (IWM) Up Big Last Year
But I’m not interested in buying the index.
In Game-Changing Stocks, my premium advisory, I am tasked with finding companies — not indices — that are poised to break rules, outgrow competition, become household names or start new trends. I scour the market for the top stocks to invest in to follow developing technologies and trends. And here, small caps carry some advantages.
Incredibly, even in our information age, small-cap companies still don’t get enough coverage compared with their large-cap peers.
Virtually no development can go unnoticed for larger tech firms like Apple Inc. (AAPL) or Facebook Inc (FB). After all, more than 50 Wall Street analysts cover each company, not to mention TV and print journalists. On the other hand, major developments in many smaller companies can go unnoticed for quite some time. These firms simply fly under radar.
Small companies on the verge of technological breakthroughs or on the forefront of a new trend can be fully expected to benefit from another feature of the market: Money is still cheap to borrow. Large companies, especially tech leaders, have a lot of cash on their balance sheets. That could lead to a spree of mergers and acquisitions, which would be beneficial to the small caps being picked up.
Cash On Hand, Selected Large Caps
When large-cap companies have this much cash on hand, this means their ability to make money has exceeded their ability to be innovative. In such cases, buying smaller innovators is often the easiest path to new breakthroughs. All things considered, it’s easy to predict that these tech giants’ cash is going to provide long-term support to a period of strong merger-and-acquisition activity.
And even if I’m overestimating the willingness of these tech giants to buy their smaller peers, the mere fact that their cash balances have ballooned to these incredible amounts should serve as a support (or a “floor”) under the smaller-cap companies’ share prices, especially for those companies that prove themselves to be on the forefront of the newest and most disruptive technologies.
The rule-breakers and the game-changers are, therefore, likely to be in a position to leverage their achievements as their large- and mega-cap peers remain under pressure from the markets to deliver consistent quarterly earnings growth.
As a group, small caps are also set to benefit from other new developments that can make them some of the top stocks to invest in for 2017.