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Among the lowest-priced investing options this fall are small cap stocks - often defined as companies whose total market capitalization (stock price times number of shares) runs from $300 million to $2 billion.
The Russell 2000, an index that tracks the 2,000 smallest public companies, was trading at a price-to-earnings ratio, based on estimated earnings, ranging from 15 to 20 this summer, the lowest range in more than a decade. That discount is one big reason Ed Clissold, Chief U.S. Strategist for Ned Davis Research, turned bullish on small caps this summer. "Small-caps could be in the early stages of a multi-year run of outperformance," he says.
History is certainly encouraging. The sector strongly outperformed the last time small cap stock prices were so low - in the run up to the 2001 recession. If you bought a fund tracking the Russell 2000 index around the March 2001 start of that recession, by March of 2005 you'd have gained a cumulative total return of 42%. The large cap Russell 1000 index had only started recouping its losses by then and was up just 6%.
There are plenty of other reasons to take a flyer on small caps. Clissold believes they will disproportionately benefit from trends such as deglobalization and a strengthening dollar because small caps tend to be more U.S. focused. And several academic researchers have found that over the very long run, small cap stocks tend to gain more than those of large companies.
All this might make savvy investors suspicious: If that's all true, why are small caps so unloved now?
Four big reasons: Small caps are more volatile than
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