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New Highs in a Key Sector Tell Us What’s to Come

I hope you didn’t spend too much time over the holiday listening to the “permabears” on TV. The bull market is doing just fine — and we got further evidence that there’s more to come in a key sector.

small-cap stocks

Source: Shutterstock

We talked the other day in MoneyWire about all the signals pointing to more all-time highs — record sales for Cyber Monday and Black Friday are just the latest example. Yet, when it comes to stocks, I think there was still one sticking point for a lot of folks, and that’s the breadth of the market’s recent strength.

Sure, the S&P 500 achieved new highs in October, and the Dow and the Nasdaq joined the party by early November. But small caps hadn’t hit new highs for over a year … until November 25.

Let me explain why that’s so significant …

The small caps celebrated Thanksgiving two days early with the Russell 2000’s 2.1% pop to a new 52-week closing high. It is now trading around 1,600, as you see in the chart below, which is a key level. I think the index could be on the verge of a major breakout.

Russell 2000 Performance

Strength in small caps is healthy for the market overall. It shows investors are comfortable with taking on risk in anticipation of worthwhile returns. It’s healthy in this particular case because small caps have lagged and needed to catch up.

And from my perspective, it is great news for the portfolios I run. Particularly in Early Stage Investor, where we own plenty of small caps. We aim to catch them before they make a big run higher to market dominance.

But, of course, we can’t just stop at “What happened?” We’ve got to ask ourselves, “What will happen now?” And the analysts at LPL Research found some clues that reinforce my expectations for 2020.

LPL looked at past situations where the Russell 2000 made new 52-week highs after going more than a year without doing so. In the table below with data from LPL and FactSet, you’ll see each outcome.

You’ll also see there’s good news for early investors: Out of the 11 times this has happened before, the Russell was higher a year later on 10 occasions — 91% of the instances. (The exception was April 2002 through 2003, which was a pretty rough time for the market overall.)

Returns Were Strong After More Than a Year Without a New 52-Week High

Those 12-month gains are worth getting excited about: the median return was +16.4%, and the average return was +17%.

That being said, I’ve identified plenty of individual small caps where I expect much better returns long term.

One is Fulgent Genetics (NASDAQ:FLGT), a $210 million company that does genetic testing to diagnose diseases. We looked at Fulgent in early November, when its third-quarter report showed an 85% surge in revenue year-over-year, as well as earnings of $0.14 per share — way more than the $0.03 Wall Street had been expecting.

That earnings report propelled FLGT to a 148% gain for my Early Stage Investor subscribers! Shares have pulled back since then, after the company announced it would price a secondary offering at $11.25 per share, but it’s normal for microcap stocks to use big rallies to raise money in the secondary market.

At current prices around $12, FLGT is trading at about five times its revenue projections for 2020. As that corrects, I fully expect Fulgent to get back to (and exceed) prices in the mid- to high-teens.

Speaking of biotech … I expect big things in 2020. There’s a specific subset of stocks in that group I’ve got my eye on now. With heavy government investment planned for the next five years, the potential here is, honestly, incredible. Click here for my free briefing on this little-known opportunity.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.

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