by Marc Lichtenfeld, Senior Analyst, Smart Profits Report
Thursday, April 16, 2009
Want to get ahead in the investment world?
Just follow the advice of infamous bandit, Willie Sutton.
When asked why he robbed banks, Sutton had a ridiculously logical answer: “Because that’s where the money is.”
Duh.
While I wouldn’t suggest you follow Willie’s profession, you can use his logic when investing.
Question is: Where’s the money now?
Small Cap Investing - Leading The Way In 2009
Look no further than small-cap stocks…
Since the March 6 low, the Russell 2000 small-cap index has shot up by 34.6%. Compare that to the rise of 27.3% for the S&P 500 and 24.2% for the Dow Jones Industrials and you can see why small-caps get their reputation for leading the market out of recessions and bear markets.
- Historically speaking, small-caps outperform their larger-cap peers in both short timeframes and over the longer-term, too.
- In fact, from 1943 to 2007, small-caps outperformed large-cap stocks by over 50 percentage points in the three years after a recession.
- Breaking it down further, a glance at the top 50 performing stocks so far this year contains a disproportionate amount of small-cap names.
How disproportionate exactly?
Well, with 70% of the top 50 performers having market caps under $1 billion and 54% of them with market caps under $500 million, I’d say it’s a large majority.
Small Caps… Big Punch
It makes sense that a smaller stock has greater potential for larger moves. For one thing, it takes less buying volume to move a stock with a $300 million market cap than it does for a $30 billion name.
The big bonus for smart investors is that many of these smaller stocks receive less attention from Wall Street and the media. And that throws up some excellent opportunities.
- Take Dupont Fabros Technology (NYSE: DFT), for example - a company with a $150 million market cap. The stock was plodding along uneventfully until it reported strong earnings in February. Once Wall Street caught wind and issued an upgrade, shares jumped by 37% - and then went on to double in the next two months!
- Dendreon Corporation (Nasdaq: DNDN) saw an even bigger move.
