Small-Cap Comeback?

Recent interest rate increases have turned small cap stocks into potential money makers. It may be the time to hit the buy button on that little stock you’ve been keeping your eye on. While stocks have taken a beating this year, small caps have taken it on the chin.

The chart shows the weighted forward price-to-earnings ratio for the S&P Small Cap 600 Growth Index XX:SP600G relative to that of the S&P 500 SPX. This is the cheapest that the S&P Small Cap 600 Growth Index has been, relative to the S&P 500, since FactSet started tracking the data in 1998. This is a subset of the S&P 600 Small Cap Growth Index SML that includes 332 companies exhibiting higher growth characteristics based on “sales growth, the ratio of earnings change to price, and momentum,” according to S&P Dow Jones Indices. You can read more about the index criteria here. Over the past 10 years, the iShares S&P Small-Cap 600 Growth ETF has traded well above the forward P/E valuation of SPY on average. But now it is the cheapest of the listed ETFs relative to the large-cap benchmark, at 63%.

Neuman named FirstService Corp. FSV CA:FSV as an example of a small-cap growth stock in an industry investors may not typically associate with growth: residential property management. The company is based in Toronto and is the second-largest holding of the Alger Weatherbie Specialized Growth Fund ASMZX, which specializes in finding growth stocks off the beaten path, he said.


Top holdings of the Alger Weatherbie Specialized Growth Fund

Here are the fund’s top 10 holdings (out of 49) as of April 30:

Company Ticker Industry % of portfolio
Casella Waste Systems Inc. Class A CWST Environmental Services 6.0%
FirstService Corp FSV Real Estate Development 5.8%
Montrose Environmental Group Inc. MEG Misc. Commercial Services 5.5%
SPS Commerce Inc. SPSC Software 5.4%
SiteOne Landscape Supply Inc. SITE Wholesale Distributors 5.1%
Progyny Inc. PGNY Misc. Commercial Services 4.8%
Globant S.A. GLOB Information Technology Services 4.5%
Hamilton Lane Inc. Class A HLNE Investment Managers 4.4%
Chegg Inc. CHGG Misc. Commercial Services 4.3%
Core Laboratories NV CLB Oilfield Services/ Equipment 4.0%
Source: FactSet





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