They’re back! The case for small stocks
A U.S. advisory specializing in microcap stocks notes the mainstream media has suddenly remembered that small stocks lead a rally.
Opportunity knocks. Yet danger lurks around every corner.
Small stocks are back! Money magazine said so.
This comes as welcome news in Newport News, Virginia, where Mr. Max Bowser was never of the opinion that small stocks had gone away.
He doesn’t think investors should buy anything but small stocks. In fact, he doesn’t recommend anything that sells for more than $3.00 a share, whether the market is up, down or moving sideways.
He’s just happy to see someone in the mainstream media acknowledge the role of the smaller stocks in the recent stock market rally.
Still, Money thinks small stocks are dangerous. Mr. Bowser does not. We’ll get to that debate in a minute.
But first, we’ll dip into The Bowser Report to see how small stocks take the lead in a recovering market.
Faster than the market
Mr. Bowser quotes from Money: “A funny thing tends to happen in the depths of the great recessions. At the first sign that the worst of the storm may have passed, investors often turn to small businesses with the potential to grow faster than the market as a whole.”
History says so. “It happened in the 1973-74 downturn, when small stocks beat the large ones for 10 straight years — between 1974 and 1983. It was also true of the Great Depression.
“This helps explain why blue chips have beaten blue chips by two percentage points a year since 1926.”
Is the recent equity rally a sign that recovery is on the way, asks the magazine? “If it is, here’s a clue: Small is leading the way. The Russell 2000 Index of small stocks is up 37% since March 9 vs. 26% for the S&P 500 Index of large-capitalization shares.”
The magazine concludes with a line Mr. Bowser approves of heartily: “So now is the time to start paying attention to little stocks.”
Most powerful in decades
This editor is not going to let the argument rest solely on the laurels of one article. He turns to a chart that tracks yearly highs on Nasdaq. A low was reached in the week of March 13. Only six highs were recorded then.
Recently, the number has shot up. NYSE and Alternext have their own highs, of course, but Mr. Bowser chose Nasdaq “because it represents a wide variety of investors — institutions, individual high rollers and the buyers of our stocks.”
During the week ending May 22, 86 stocks reached their highest levels for the past year.
The editor trots out another heavy-hitter in the media. In a May article, the Wall Street Journal observed that the Dow Jones Industrial Average had hit a 12-year low on March 9.
“Since bottoming out in March, the Dow has surged, which means that investors who sold at the bottom have missed out on one of the most powerful rallies in decades.”
Some $70 billion flowed out of equity mutual funds or exchange-traded funds in February and March. In the eight weeks to mid-May, investors poured money back into both stocks and bonds — $13.5 billion in one week alone.
The gauges of fear
Fear appears to be falling away. Yet another media bigwig, USA Today, took note on May 22 of the Chicago Board of Exchange (CBOE) Market Volatility Index, the pre-eminent gauge of fear in the market.
In November 8, it indicated that investors were virtually paralyzed with fear. Now it has eased, and stands at less than half last year’s levels.
“If the fear levels can at least hold where they are, it’s a sign buyers are willing to step up,” said Todd Salamone of Schaeffer’s Investment Research. But it’s not quite full steam ahead. “What we’re seeing is the unwinding of extreme fears, not growing optimism.”
But the fear of small stocks is wildly exaggerated, says Mr.
Bowser.
Joining the Mafia
Returning to the Money article, Mr. Bowser notes that while the publication acknowledges that small stocks are about to take off, investing in them “is akin to joining the Mafia. There’s a possibility of making big money but — boy oh boy — is it dangerous.”
Specifically the magazine said: “Not only are corporate seedlings untested, but many don’t have the resources to compete with bigger, established firms.”
Phooey, says Mr. Bowser. “This is written by someone who probably has never studied small stocks comprehensively or invested in them. This is the standard line from those who love big stocks ...
“Has it ever occurred to them that ‘bigger, established firms’ were once small?”
And history tells us that when the market rebounds, those small stocks move a lot faster than the big guys.
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