: These small-cap stocks will lead the market if the rally has legs

by | Aug 12, 2022 | Stock Market

If stock market FOMO is starting to bug you, but you’re hesitant to buy stocks, here’s a fix: Go small. Small companies are still super-cheap. These aren’t companies whose CEOs grab headlines when they speak. You may not even have heard of most of them. But when you buy their stocks, you are investing in the economic heart and soul of the U.S. Small companies employ most people in the country. You probably work for one.

Here are three reasons why they look attractive.1. The smaller, the better The Russell 2000 Index
which tracks smaller companies, recently traded at a forward price-to-earnings (P/E) of 12.4. That is 19% below its historical average (since 1985). In contrast, the Russell 1000 Index
of larger-cap names trades at a forward P/E of 17.5 times. That is 13% above its average. Put another way, the relative forward P/E of the Russell 2000 is 0.71 time the Russell 1000 forward P/E, below its average of 1.01 times. (These data come from Bank of America researchers Jill Carey Hall and Nicolas Woods, in a note published this week.)

This value differential implies vast outperformance for small companies, say Hall and Woods. It suggests 12% annualized returns for Russell 2000 small-cap names over the next 10 years vs. 7% for the larger-cap Russell 1000 names. Small companies are generally a good p …

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