{"id":48944,"date":"2023-08-16T01:34:50","date_gmt":"2023-08-16T05:34:50","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/maybe-time-to-look-at-small-cap-stocks\/"},"modified":"2023-08-16T01:34:53","modified_gmt":"2023-08-16T05:34:53","slug":"maybe-time-to-look-at-small-cap-stocks","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=48944","title":{"rendered":"Maybe Time To Look At Small-Cap Stocks"},"content":{"rendered":"
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When evaluating large-cap returns against small caps, the small-cap index one chooses is important. Essentially, one can evaluate small-cap returns as measured by the Russell 2000 Index or small-cap returns measured by the S&P 600 Index.<\/p>\n

The difference between the two indices rests in their construction with S&P’s <\/span>inclusion criteria consisting of “positive earnings, liquidity and public float results in the constituents of the S&P Smallcap 600 Index being more profitable, more liquid and more investable than those of the Russell 2000.”<\/span><\/p>\n

S&P’s profitability criteria seems to be an important difference in the S&P 600 Index’s outperformance. For the Russell 2000 Index, over 10% of companies are what some call Zombie companies, those companies that struggle to pay the interest on their debt.<\/p>\n

The T. Rowe Price report referenced below notes not all unprofitable companies are bad investments, but with interest rates much higher than a year ago, debt service for some of these firms might be challenging going forward and result in weaker stock returns. S&P’s profitability criteria for the S&P 600 Index is an effort to avoid some of these firms.<\/span><\/p>\n

\"zombie<\/p>\n

Over a long period of time, thirty-four years in this case, small-cap stocks, i.e., the S&P 600 Smallcap index, have outperformed large company stocks as seen in the below chart.<\/p>\n

The S&P 600 Small Cap Index is represented by the blue line on the chart and this small cap index has outpaced the large-cap S&P 500 Index as well as the Russell 2000 Index.<\/p>\n

\"S&P<\/p>\n

Over the past ten years though, since near the end of 2013, small-cap stock performance has lagged the large-cap S&P 500 Index by a pretty wide margin as seen in the next chart below.<\/p>\n

\"S&P<\/p>\n

In a recent report from T. Rowe Price, The Outlook for U.S. Smaller Companies Looks Increasingly Compelling, the report highlights a number of factors supporting the potential opportunity in small-cap stocks.<\/p>\n