Is the Bear Market Finally Over for Small-Caps?
Get ready for the next market cycle for small-cap stocks.
Investors welcomed the news in early June that the S&P 500’s bear market had ended, with stocks finally rising greater than 20% from the lows reached on October 12, 2022.
Given ongoing uncertainties about inflation and the direction of interest rates, major bank collapses and stresses on the entire banking system, and a cantankerous Congress refusing to act sensibly about the debt ceiling, it is somewhat remarkable that investors were able to tune out the noise and plow ahead with stock buys in their portfolios. But as I have pointed out several times, company fundamentals and the outlooks for many sectors, industries, and businesses have been convincingly positive for many months now. It was only a matter of time before the mood of the market shifted from fearfulness to reflect the actual underlying basics and push prices up.
In even better news (for us), small-cap stocks are on pace to close out June in their first positive month since January 2023. This is a positive sign for the broader market since small-caps often rally before large-caps at the end of economic downturns, and thus confirms a signal of greater investor confidence.
Satisfyingly, many of the companies followed in the SmallCap Informer have seen their share prices edge upwards since May. Last month seemed to bring an abundance of riches, with many stocks in SCI offering attractive risk-adjusted rewards. This month, the basket is not overflowing, but perhaps only filled to the brim with strong buys.
This reflects the broader market trend for small-caps.According to FactSet, the S&P SmallCap 600 index currently trades at a projected P/E ratio of about 13.5, still below its 10-year average of 15.9.
Many of our covered companies are still carrying valuations that reflect more of the macro headwinds that had been battering the markets than the fundamental tailwinds that are driving their current business successes.
As always, investors who can take advantage of the mismatched valuations assigned to well-run businesses can profit by investing in the stock market over time.
In this issue of the SmallCap Informer we introduce a retail real estate business that may reward patient investors with an attractive dividend while they await the capital appreciation that seems likely given the company’s presently undervalued share price and sturdy fundamentals.
Stay the course!
- DOUG GERLACH
Subscribers can read Doug's complete commentary and in-depth profile of our recommended small company stock in the June 2023 issue of the SmallCap Informer stock newsletter. Not a subscriber? Subscribe to the SmallCap Informer and get monthly small company stock recommendations and updated buy/sell prices for each of the 48 high-quality small company stocks currently covered in the newsletter.