Favorite Small-Cap Stock Sectors
The Future of Small-Cap Stocks
In Case You Missed It
Today I’m bringing you a special Q&A with Cabot Small-Cap Confidential Editor Thomas Garrity. Earlier this week, Timothy Lutts told you that small-cap stocks are leading the current market advance: while the Dow Industrials are up 26% over the past 13 weeks, the S&P 600 Small-Cap 600 Index is up a whopping 39%. Even better, stocks currently recommended by Cabot Small-Cap Confidential are up 49% in the past 13 weeks. The Q&A should help you better understand why small-cap stocks are leading the market, what you should be looking for now in individual stocks and where Tom sees the market and small-cap stocks going in the second half of 2009. Enjoy!
(We ran another Q&A with Tom in December, which you can read here: http://www.cabot.net/Issues/CWA/Archives/2008/12/Future-of-Small-Cap-Stocks.aspx )
Question: What is your current outlook on the stock market?
Answer: Stock markets traditionally look forward and take their cues from leading economic indicators. The deterioration of credit conditions in 2008 and into the most recent quarter put strains on industrial production, employment growth, housing activity and consumer spending. All of these areas play leading roles in economic expansion or contraction. A weakening of these underpinnings caused a shift in investors’ mindsets, so they retreated from industrial, financial, oil and other typically leading stocks, and instead focused on consumer staples and household name stocks.
However, it seems that there has been a slight shift in these leading indicators, signaling to investors that the worst may be over and that a recovery is in place. This belief is being priced into the capital markets, increasing liquidity, consumer confidence and spending.
Stock investors have reacted accordingly, as they started to believe that world markets were in recovery mode. Investors have been moving out of positions of safety and into leadership stocks, which usually start uptrends before the economy turns positive. I believe a trend is definitely in place for the stock market to continue its upward move.
Question: How have small-cap stocks performed so far in 2009? How have they performed since the market’s low in March?
Answer: Both the Russell 2000 Growth Index and the Russell Microcap Growth Index have performed exceptionally well in 2009. The Russell 2000 Growth Index has returned 30.23% in the last three months and 7.86% year-to-date. The Russell Microcap Growth Index has gained 35.17% in the last three months and 12.58% year-to-date.
Question: What are some of your favorite sectors right now?
Answer: Cabot Small-Cap Confidential has done exceedingly well in the medical device and biotech sectors, with our six best-performing stocks up 271% collectively. Right now, the Cabot Small-Cap Confidential portfolio is heavily weighted in the medical device and biotech sectors, and although I’m very satisfied with our returns, I expect our focus will shift more toward environmental and technology stocks.
For environmental stocks, I’m looking at pollution abatement and resource recovery, as well as alternative energy stocks that involve reducing the cost of energy gathering and production. I think that for the first time in the U.S., we’re ready to do something about our energy dependence on fossil fuels. And we’re finally paying attention to the adverse consequences previous actions pose to our economic future and environment.
As far as technology stocks, the portfolio will continue to be exposed to communications and mobile technology sectors. I’m focused on investments that capitalize on the delivery of consumer services and goods, as well as strongholds in cellular protocols. I am also looking at network security stocks.
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Question: What characteristics are you looking for in the individual stocks you recommend?
Answer: One of my investment hallmarks has always been to give Wall Street’s unknown stocks a chance and I will continue to do that and rely on the metrics that have served me well for decades. I’m forever partial to companies that have monopolistic positions in thriving industries or what I like to call pure plays. A pure play is a company with a product that has created its own category in a large addressable market. Second, it’s a company with a highly dedicated research team to develop the product and a sales staff who will bring that product to market.
Question: What advice would you give someone who is ready to get back into the market after sitting on the sidelines during last year’s bear market?
Answer: Set up some clearly defined investment rules for stock investing, such as:
* Make certain the company you’re considering has enough capital to run its operations for many years and its balance sheet is (for the most part) debt free.
* Time your investment with a company-specific event.
* Get into a stock before institutional investors become aware of it.
* To the best of your ability, ensure that your investment has the highest probability for success. The proof will come from doing research and assessing data. Any company can fail, big or small, you just want to try to avoid being a shareholder when that happens.
* Only put capital to work in a stock that correlates with your investment risk tolerance and timeline.
* Finally, become committed to your investment, which means being comfortable with market volatility, and also having the patience to let it succeed.
Question: Where do you see the market, and small-cap stocks, going in the second half of 2009?
Answer: I might be slightly biased, but I believe that small-caps will follow where larger cap have already taken the market. A big movement in the price of large-cap stocks, like what we’ve just seen, is typically a prelude to great optimism. Large-cap stocks typically go out of the starting gate first and gain an early lead, however, it’s small-cap stocks that truly carry out the full extent of this optimism. As the overall market gains confidence, investors will seek out riskier investments, like small-cap stocks.
The bear market may have soured some investors on large-cap stocks, as many people invested in them for safety, but lost big when the market crashed. This new reality may indicate that investing in large-caps isn’t going to bring the biggest winners or be best path to investment goals.
Small-caps have traditionally outperformed large-cap stocks for as long as the record books have kept track. So while many investors will shy away from small-caps, there’s no doubt that they have a better performance record over time.
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Cabot Small-Cap Confidential Stocks are up a Whopping 49%!
While the Dow Industrials are up 26% over the past 13 weeks, the S&P Small-Cap 600 Index is up a whopping 39%.
Even better, stocks currently recommended by Cabot Small-Cap
Confidential are up 49% in the past 13 weeks, confirming loud and clear
#1: We are now in a strong bull market.
#2: Undiscovered small-cap stocks are once again leading the way.
#3 Cabot Small-Cap Confidential is your best source of advice when it comes to investing in this under-illuminated sector.
Over the past 79 years, small-cap stocks have outperformed large-cap
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In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, I have links below to each issue.
Cabot Wealth Advisory 6/1/09 – The Secret of Life
On Monday, Timothy Lutts wrote about the secret of life from the perspective of the infamous Groucho Marx that is sure to make you smile. Tim also gave a detailed rundown on the airline industry and finished by writing about his favorite airline stock. Featured stock: Allegiant Travel (ALGT).
Cabot Wealth Advisory 6/4/09 – A Dangerous Business
On Thursday, Paul Goodwin discussed the dangerous business of writing about emerging markets stocks and the surprising things people complain about. Paul ranted about a recent problem appliance and the benefits of buying local. Paul finished by writing about a Chinese TV stock. Featured stock: China Digital TV (STV).
Until next time,
Editor of Cabot Wealth Advisory
Editor’s Note: Congratulations to Cabot Market Letter Editor Michael Cintolo, who was recently recognized by the Specialized Information Publishers Association for having the Best Financial-Advisory Newsletter in 2009. Representing thousands of newsletters and specialized publications, SIPA selects its awards among hundreds of entries annually from exceptional journalists worldwide. From the March 2003 market bottom to the March 2009 low, Cabot Market Letter’s Model Portfolio gained 94%, while the Nasdaq lost 3.5% and the S&P 500 lost 18%. Don’t miss out on the early innings of the new bull market. Get started with Cabot Market Letter today!
P.S. Don’t forget to enter our essay contest: How I Lost Money in the Bear Market and What I Would do if I had Another Chance. Here are the rules: maximum 1,000 words; one entry per email address; send entries via email to email@example.com; the winner will receive a one-year free subscription to your choice of these Cabot newsletters: Cabot Market Letter, Cabot Top Ten Report, Cabot China & Emerging Markets Report, Cabot Green Investor, Cabot Benjamin Graham Value Letter or Cabot Stock of the Month Report.
The contest deadline is June 30, 2009 and winners will be announced on July 12, 2009. The top three essays will be selected by a panel of Cabot editors, and readers will vote on the winner. We may choose to reprint any entries in Cabot Wealth Advisory, but will keep names confidential. Good luck!