Daily Gains Letter

Small-Cap Stocks Outshining NASDAQ, S&P 500; Top Investment in 2015?

By for Daily Gains Letter |

Top InvestmentIf you haven’t already done so, you should start to take a closer look at small-cap stocks.

Small-Cap Stocks Outperforming in 2015

While small companies underperformed in 2014 with the Russell 2000 gaining a mere 3.53%, compared to the 13.40% and 11.41% advances by the NASDAQ and S&P 500, respectively, I believe that as the long as the economic renewal holds, small-cap stocks could turn things around this year.

So far in 2015, small-cap stocks are second only to the technology sector. The Russell 2000 is up 2.10% as of Thursday, versus a 4.88% move by the NASDAQ. At this time, small-cap stocks are beating the S&P 500 and DOW; it’s still early on, but it’s looking good coming off of a soft year in 2014.

The chart of the Russell 2000 shows a record-high and the presence of a bullish golden cross, with the 50-day moving average (MA) above the 200-day MA, based on my technical analysis.

Russell 2000 Small Cap Index Chart

Chart courtesy of www.StockCharts.com

Whether small-cap stocks can return the kind of performance we saw in 2013 is not certain, but I like the prospects for growth investors.

The reality is that small companies tend to fare better as an economy recovers due to the added flexibility to shift strategies on the run and adapt to changing situations. Imagine a large-cap like General Electric Company (NYSE/GE) trying to be nimble and change on a dime? It’s not so easily done.

Areas that I like amid the small-cap stocks are broad. I favor small companies that show strong growth metrics and have consistently managed to deliver strong results.

Top Small-Cap Stocks to Watch in 2015

One sector that I feel provides the top risk-to-reward opportunities for both traders and investors continues to be the technology sector—namely the mobile, chip manufacturing, and Internet spaces. These are the higher-beta elements of the small-cap sector, which translates into added risk, but also greater reward potential. Stay away from companies that do not have decent fundamentals or at least offer a good story that makes some sense.

I also like small-cap cyclical stocks that move in line with the economy.

Small regional banks with good dividends are also interesting.

Dividend-paying small-cap stocks also make sense for those seeking both capital appreciation potential and income.

I view small-cap stocks weakness as a potential trading or investment opportunity at this time, as valuations tend to be more attractive and worth a look for aggressive investors. Overall, investors need to be diversified as far as market capitalization and sectors.

Small-cap exchange-traded funds (ETFs) that may work with some who prefer more diversity include the iShares Russell 2000 (NYSEArca/IWM) and the iShares Core S&P Small-Cap (NYSEArca/IJR) ETFs.

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