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Are Small Caps Undervalued?

by Alan Daniel
, Are Small Caps Undervalued?

Market indices are at all-time highs. Large-cap stocks such as Apple saw at least 80% price increases to the 52 week low. The large-cap market is led by companies such as Apple, Microsoft, and Amazon; they continue to drive large caps while others face issues. Investors such as Ray Dalio and others point troubling factors that may lead to a potential recession, while others think that the market can go even higher. Whether we will have another melt-up or correction may be essential to know for those who trade in the short term.

The current environment makes purchasing new shares a bit tricky. You don’t want to be the person who bought at the top only to sell as your stocks decline in value.

Legends such as Warren Buffet overcome FOMO and keep capital on the sidelines. Berkshire Hathaway keeps more than $100 billion in cash, waiting for great opportunities to present themselves. The leadership team at Berkshire Hathaway, known for making great deals, seems to be shying away from making any significant deals in the current market. Apparently, they’ve even sold more investments earlier this year than they have purchased.

Of course, Berkshire Hathaway must make different types of decisions due to their significant capital positions to get the best returns.

But still, more sales than buys is worrisome. The lack of purchases may indicate a lack of value in the current large-cap markets. Firms such as Berkshire Hathaway may think that we are at the end of the economic cycle and may hold off and buy assets when they are dirt cheap.

Yet all hope is not lost; investors can find opportunities in this current market. A few may turn to alternative asset classes such as cryptocurrencies and buy bitcoin and ethereum. Others may turn to gold, and others may buy up small-cap companies.

Indeed, depending on one’s thesis, there may be a more significant upside for small caps and bitcoin than for large caps as they may tend to more overvalued. For those who may not be able to stomach bitcoin movements, small caps may be an option.

Small Caps To The Rescue

A few investors may see better returns going forward in small caps because many of these stocks have yet to recover from the highs of 2018. Investors may see about a 5% to 15% upside in small caps due to its recovery potential.

The Russell 200 Index was at 1740.75 on August 31, 2018, before plunging to the 1200s in December 2018. The index is currently at 1596.45 at the time of this writing. If momentum were to continue in large caps and small caps, the RI should gain further.

Further, compelling stocks such as Clarus, RCM technologies, Attento, and Qualys are just a few of some of the exciting stocks investors may generally find in the small-cap market.

Remember that investors look at the small-cap market because many great companies start small and grow. Corporations such as Walmart and others had to start small before they became who they are today.

Watch the Russell 2000 Index.

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