Last week I asked Ian Wyatt from SmallCapInvestor.com to come and teach us a little about why small caps are perfect for active traders. It got a pretty good response, so today I invited him back to convince us that small cap stocks are our way out of the recession...please feel free to comment with your thoughts and opinions as it's YOU that drive this blog!
Investors and traders seeking to recover from the losses of the bear market need to consider small-cap stocks, due to their consistent out-performance following a downturn in the stock market.
Several recent studies show evidence that small-cap stocks are most likely to be the best performing among equities following a recession.
According to a T. Rowe Price report entitled, A Perspective On Financial Topics For Our Investors, in the 12-month period following the end of the last nine recessions, small-cap stocks on average gained 24 percent, compared with a 17.6 percent gain for the S&P 500.
And in another study from Merrill Lynch of the 18 bear markets since the 1930s, small caps posted an average gain of 41.4 percent in the 12 months after the end of the decline, compared with a median gain of 32.4 percent for large caps.
This is not only true historically, but is also demonstrated by the significantly superior performance of small caps versus large caps and other equities. From the March 9 lows, the Russell 200 Index, the barometer for small-cap stocks, has risen 78 percent as of September 29. Compare this with the 58 percent gain for the S&P 500 during the same period of time, and the relative out-performance of small caps during the last seven months is evident.
The recovery of all equities has been greater than the historical norm as a result of the much greater decline. And the small-cap out-performance remains evident following the crash of 2008 and early 2009. Continued superior performance for small-cap stocks is likely, and those high quality companies are likely to perform the best.
The cash for clunkers stock market rally has propelled gains for some of the lowest quality stocks, including those companies in the financial sector that were left for dead. However, with the current recession likely to last several years, and the recovery unlikely to materialize overnight, investors are likely flock to higher quality stocks when the going gets tough.
Small-cap stocks with strong businesses that produce rapidly growing revenues and healthy profit margins are likely to be the out-performers in the coming year. Using my simple eight-step system, you can discover how to find unknown small-cap stocks with the potential for big profits.
Step 1: Growth Trends: Identify growth trends and market sectors positioned for rapid growth in the years to come.
Step 2: Finding Potential Winners: Screen more than 7,000 publicly traded companies to find those companies that are unknown performers and are positioned to grow.
Step 3: Fundamentals Matter: Understand the fundamentals of the potential investment, including products, services, and management’s ability to run the business.
Step 4: Financial Performance: Review and evaluate key metrics in a company’s financial statements to understand historical financial performance.
Step 5: Earnings Quality: Look for red flags that indicate financial manipulation or fraud, to avoid investing in a small-cap lemon.
Step 6: Growth Outlook: Develop an understanding of expectations for growth to make valid valuation comparisons.
Step 7: Technical Analysis: Understand the technical indicators of share price movements to help timing of investments, and maximize profits while limiting losses.
Step 8: Pulling the Trigger: Determine the optimal timing for entering new positions by using effective trading strategies.
In my recently released book, The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks I’ll share with you the details of my simple eight-step system for profitably investing in small-cap stocks, and show you exactly how to find the next big stock market winners.
Please take time to check out my book The Small-Cap Investor: Secrets to Winning Big with Small-Cap Stocks and receive an EXCLUSIVE special offer for Trader’s Blog readers only!