It has been several years since we have seen a significant rally in small caps. The bounce back following the pandemic lifted most ships in the harbor but the small caps were left out of a good part of that rally. 2022 saw a lot of the gains given back and the tech sector was especially weak that year. All that adds up to an extended drought for small caps.
One of the things that small caps need for their overdue rally to start is lower rates. Over the last couple of years investors have been awaiting significant rate cuts. Start of 2024 saw expectations of double-digit rate cuts, but they were delayed until the end of the year.
Rate cuts play a big role of the expectations for small cap companies. The access to cheaper money allows for more growth and expansion.
Rate Cut Cycle
Prior to the election, the Federal Reserve decided it was time to ease its stance on monetary policy. It had been a long time in coming, but finally the rate cut cycle had begun.
Investors were initially looking for six rate cuts, which would bring down interest rates from around 5% to about 3%. This would serve as the tailwind that small caps have been begging for.
But nearly as soon as the right cut cycle began, there were fears that it was going to end. Economists questioned the need for rate cuts as inflation persisted. Stocks were near or at all-time highs, but that did not include the small caps.
Struggles Of Small Caps
Small cap companies tend to be lesser known entities. They are typically not the big brand names in any segment of the economy and don’t carry much in the way of name recognition. As such, small caps have much tougher sledding when it comes to accessing the capital they need to ramp production.
Small caps also tend to carry a lot more risk for investors than the larger capitalized companies. This added risk translates, again, into a higher cost of capital if it is to be raised via stock offerings.
That excess risk is also an obstacle for some of the biggest investment houses when they analyze a potential investment in a smaller company. Since they are smaller, it is harder for these companies to get research coverage from some of the biggest broker-dealers. Without the research coverage the investment houses take on more responsibility for making an investment in a small company as there isn’t that extra set of eyes from the bulge bracket watching along with them.
The Rewards of Small Cap Investing Can Be Huge
Just in the sense of size, it is hard to imagine a mega cap software company doubling or tripling in price over the course of a year… but not for a small cap company.
Good news often begets more good news for the smaller companies as the attention from a big earnings beat or major contract win can bring more eyeballs to their product or service. That, in turn, will drive investors to chase shares higher… and due to their small cap nature there often isn’t a lot of sellers at the top and that can cause stock prices to soar.
Keep reading . . .
------------------------------------------------------------------------------------------------------
Stocks Under $10 to Buy Today
Zacks is now revealing its most compelling picks priced under $10 per share (but perhaps not for long). These high-quality companies have prospects for returns of up to 2X and more. While not all our picks are winners, recent recommendations have led investors to gains of +129.7%, +164.7% and even +263.2%.¹
These stocks offer the best of both worlds: immediate growth potential AND the strong likelihood of long-term profitability.
This special opportunity ends at midnight Sunday, December 8.
See Stocks Now >>
------------------------------------------------------------------------------------------------------
One of the key ideas behind this whole scenario is being invested in the small cap stock before the big move. Being in early and before the move can be much more profitable for investors than chasing a small cap on its way up. The inherent problem with this part of the strategy is that it can be hard to know when a small cap name is about to take off. Thus, owning a basket of stocks is the best solution to the problem.
The final aspect that needs to be addressed on the idea of the rewards of small cap investing is that a healthy dose of patience goes a long way. There are hundreds of examples of companies that start of small and just kept growing. If an investor finds a great small cap stock, the chances of it growing to a mid cap and then maybe in a large cap are pretty good.
That scenario is the stuff investing dreams are made of.
Execute On A Plan For Small Cap Stocks
Now that we have an idea of the risks and rewards of small cap investing, as well as the knowledge that a rally in the space is long overdue, we need to have a plan of attack. While this plan is simple, it requires something that few of us have – constant diligence. Investors have to be prepared to closely follow not only the stocks they hold, but their competitors and the biggest of names in any given sector.
Another critical success factor that was touched on before is having a basket of stocks. Finance textbooks from the 1950s suggested that proper portfolio diversification comes from 25 stocks… but the academics have more recently revised that number to 12-15. That is still a lot of stocks to follow but it prevents the average investor from being overexposed to the more risky stock segment.
Finally, investors need to pay attention to the fundamentals of the companies they own. Be sure to see that they are not only growing sales and earnings but that they are also outperforming the expectations of Wall Street. For this to happen a company needs a qualified management team that knows how to communicate to the street in such a way that they guide their expectations to a beatable level.
Add all these factors together and you have a great framework for small cap stock success.
Finding Today’s Top Small Cap Stocks
If you're looking for one of the most potentially profitable ways to cash in on low priced, under-the-radar stocks, I invite you to follow the live trades in our Stocks Under $10 portfolio.
We focus on companies that are primed to make big upward moves. We get in when the Zacks Rank and other proven indicators point to success ahead and ride them toward serious growth. For example, we've recently closed out positions with gains of +129.7%, +164.7% and even +263.2%.¹
Right now, I'm lining up a brand-new recommendation for Monday, which I chose for its double or triple-digit gain potential.
And you can see it, plus all buys, sells and market commentary from this portfolio, for just $1.
Get started today and you're also welcome to download our Special Report, 5 Stocks Set to Double. It highlights 5 tickers Zacks' experts predict have the highest probability of soaring +100% and more in the next 12 months.
But a word of caution: Your chance to download this bonus report ends at midnight, Sunday, December 8.
See our Stocks Under $10 and download the Special Report now >>
Best,
Brian
Brian Bolan is our aggressive growth expert and the editor of Zacks Stocks Under $10 portfolio.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. Access grants you a comprehensive list of all open and closed trades.
Image: Bigstock
Are You Ready for a Small Cap Rally?
It has been several years since we have seen a significant rally in small caps. The bounce back following the pandemic lifted most ships in the harbor but the small caps were left out of a good part of that rally. 2022 saw a lot of the gains given back and the tech sector was especially weak that year. All that adds up to an extended drought for small caps.
One of the things that small caps need for their overdue rally to start is lower rates. Over the last couple of years investors have been awaiting significant rate cuts. Start of 2024 saw expectations of double-digit rate cuts, but they were delayed until the end of the year.
Rate cuts play a big role of the expectations for small cap companies. The access to cheaper money allows for more growth and expansion.
Rate Cut Cycle
Prior to the election, the Federal Reserve decided it was time to ease its stance on monetary policy. It had been a long time in coming, but finally the rate cut cycle had begun.
Investors were initially looking for six rate cuts, which would bring down interest rates from around 5% to about 3%. This would serve as the tailwind that small caps have been begging for.
But nearly as soon as the right cut cycle began, there were fears that it was going to end. Economists questioned the need for rate cuts as inflation persisted. Stocks were near or at all-time highs, but that did not include the small caps.
Struggles Of Small Caps
Small cap companies tend to be lesser known entities. They are typically not the big brand names in any segment of the economy and don’t carry much in the way of name recognition. As such, small caps have much tougher sledding when it comes to accessing the capital they need to ramp production.
Small caps also tend to carry a lot more risk for investors than the larger capitalized companies. This added risk translates, again, into a higher cost of capital if it is to be raised via stock offerings.
That excess risk is also an obstacle for some of the biggest investment houses when they analyze a potential investment in a smaller company. Since they are smaller, it is harder for these companies to get research coverage from some of the biggest broker-dealers. Without the research coverage the investment houses take on more responsibility for making an investment in a small company as there isn’t that extra set of eyes from the bulge bracket watching along with them.
The Rewards of Small Cap Investing Can Be Huge
Just in the sense of size, it is hard to imagine a mega cap software company doubling or tripling in price over the course of a year… but not for a small cap company.
Good news often begets more good news for the smaller companies as the attention from a big earnings beat or major contract win can bring more eyeballs to their product or service. That, in turn, will drive investors to chase shares higher… and due to their small cap nature there often isn’t a lot of sellers at the top and that can cause stock prices to soar.
Keep reading . . .
------------------------------------------------------------------------------------------------------
Stocks Under $10 to Buy Today
Zacks is now revealing its most compelling picks priced under $10 per share (but perhaps not for long). These high-quality companies have prospects for returns of up to 2X and more. While not all our picks are winners, recent recommendations have led investors to gains of +129.7%, +164.7% and even +263.2%.¹
These stocks offer the best of both worlds: immediate growth potential AND the strong likelihood of long-term profitability.
This special opportunity ends at midnight Sunday, December 8.
See Stocks Now >>
------------------------------------------------------------------------------------------------------
One of the key ideas behind this whole scenario is being invested in the small cap stock before the big move. Being in early and before the move can be much more profitable for investors than chasing a small cap on its way up. The inherent problem with this part of the strategy is that it can be hard to know when a small cap name is about to take off. Thus, owning a basket of stocks is the best solution to the problem.
The final aspect that needs to be addressed on the idea of the rewards of small cap investing is that a healthy dose of patience goes a long way. There are hundreds of examples of companies that start of small and just kept growing. If an investor finds a great small cap stock, the chances of it growing to a mid cap and then maybe in a large cap are pretty good.
That scenario is the stuff investing dreams are made of.
Execute On A Plan For Small Cap Stocks
Now that we have an idea of the risks and rewards of small cap investing, as well as the knowledge that a rally in the space is long overdue, we need to have a plan of attack. While this plan is simple, it requires something that few of us have – constant diligence. Investors have to be prepared to closely follow not only the stocks they hold, but their competitors and the biggest of names in any given sector.
Another critical success factor that was touched on before is having a basket of stocks. Finance textbooks from the 1950s suggested that proper portfolio diversification comes from 25 stocks… but the academics have more recently revised that number to 12-15. That is still a lot of stocks to follow but it prevents the average investor from being overexposed to the more risky stock segment.
Finally, investors need to pay attention to the fundamentals of the companies they own. Be sure to see that they are not only growing sales and earnings but that they are also outperforming the expectations of Wall Street. For this to happen a company needs a qualified management team that knows how to communicate to the street in such a way that they guide their expectations to a beatable level.
Add all these factors together and you have a great framework for small cap stock success.
Finding Today’s Top Small Cap Stocks
If you're looking for one of the most potentially profitable ways to cash in on low priced, under-the-radar stocks, I invite you to follow the live trades in our Stocks Under $10 portfolio.
We focus on companies that are primed to make big upward moves. We get in when the Zacks Rank and other proven indicators point to success ahead and ride them toward serious growth. For example, we've recently closed out positions with gains of +129.7%, +164.7% and even +263.2%.¹
Right now, I'm lining up a brand-new recommendation for Monday, which I chose for its double or triple-digit gain potential.
And you can see it, plus all buys, sells and market commentary from this portfolio, for just $1.
Get started today and you're also welcome to download our Special Report, 5 Stocks Set to Double. It highlights 5 tickers Zacks' experts predict have the highest probability of soaring +100% and more in the next 12 months.
But a word of caution: Your chance to download this bonus report ends at midnight, Sunday, December 8.
See our Stocks Under $10 and download the Special Report now >>
Best,
Brian
Brian Bolan is our aggressive growth expert and the editor of Zacks Stocks Under $10 portfolio.
¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. Access grants you a comprehensive list of all open and closed trades.