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Is Now a Good Time for Small-Caps?

March 21, 2017

 

With the market at an all-time high, is now a good time for small-cap stocks?

 

On the one hand, large-cap stocks are up about 5% year-to-date, and small-cap stocks are basically flat. So they may be relatively cheap.

 

But on the other hand, the Russell 2000 small-cap index increased by about 20% last year, versus about 12% appreciation for the S&P 500. So they may be relatively expensive.

 

So what's the answer? Cheap or expensive?

I think the answer is, “Both” and “Trump.”

 

There are many small-cap companies whose earnings could increase by as much as 20% if, in fact, corporate tax reform becomes a reality as the Trump narrative would dictate.

 

But there is a catch. In order to benefit from a lowering of the tax rate, a company needs to pay taxes.

 

And, with its heavy weighting in early-stage growth companies, only 67% of the stocks in the Russell 2000 earned a profit last year.

 

That means that only 67% percent of the stocks in the Russell 2000 could possibly benefit from tax reform.

 

We are currently seeking to invest in companies within this tax-paying universe for two reasons:

 

1.   If Tax Rates Change: Most tax-paying stocks are not reflecting a near 20% increase in earnings, because Wall Street tends to be short sighted and Trump’s ability to get legislation passed is unproved.

 

2.   If Tax Rates are Unchanged: Even if no reform is passed we will have a portfolio of larger and more stable companies that we believe will hold up better than the index in volatile times.

 

If we are right, we have more upside and less downside - and that’s what makes for an interesting portfolio.



 

 

Integre Asset Management Disclaimer – 3/22/2017

Past performance may not be indicative of future results and every investment program has the potential for loss as well as profits. This material is presented solely for informational purposes and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security or fund interest or any financial instrument. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information. All information is current as of the date of this material and is subject to change without notice. The views expressed in this presentation are subject to change based on market and other conditions. Any views or opinions expressed may not reflect those of the firm as a whole. Additional information can be provided upon request.

 

© 2017 Integre Asset Management, LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Integre Asset Management. For further information please see www.integreAM.com or contact the firm by electronic mail at info@integreAM.com.

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