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The Death of Small-Cap Stocks: RIP 2012

Trying to pick small-time winners is a fool’s errand right now

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Even the Good Get Punished

One final word of warning in case you believe the platitudes about a “stock picker’s market.” Yes, some small caps are great for swing traders if you get in at the right time and get out for a quick gain. And yes, some stocks under $2 billion indeed have staying power and continue to march upward thanks to superior products and strong growth potential.

However, I caution you that the market is challenging and unforgiving for stock pickers. So tread lightly if you’re dabbling in small caps right now.

Take my old boss, Louis Navellier, who is one of the best fundamental analysts in the business. I used to work as an editor for his economic and stock commentary and got to know his proprietary methodology for separating the winners from the losers based on sales and profit trends.

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But according to Navellier, right now methodology doesn’t matter worth a darn. That’s because only an elite group of small caps are posting gains — and tiny gains at that — while the vast majority are gutting shareholder portfolios. Take a look at this chart to see what happens when the market is carved up into 20 slices, with the most fundamentally sound balance sheets at the top and the ones bleeding red ink at the bottom.

The latter 50%, as no surprise, is posting deep losses. But the top 50% is barely even treading water. In fact, many of the “best” small caps still are losing money for shareholders.

Louis still is dabbling in small caps, trying to focus on that blue bar to the far left. But in his words, “only the top 5% of small- to mid-caps are OK to buy.”

That’s not much margin for error.

Of course, it’s worth noting that small caps likely will benefit most when a raging bull market returns. All that cash on the sidelines will want to chase the best opportunities in fast-growing corporations.

However, we are a long ways away from a raging bull market — and we seem a long ways away from a macroeconomic picture that favors smaller upstart businesses. Consumers and businesses remain conservative in their spending, access to capital markets isn’t easy for new enterprises and many think the mayhem in Europe is going to drag on the global economy for some time.

My advice: Steer clear of small caps for now.

Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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