Tags: micro-cap | value | small-caps | stocks

Experts: Micro-Cap Stocks Offer Better Value Than Small-Caps Do

By Dan Weil   |   Monday, 05 Aug 2013 10:17 AM

While small-cap stocks are approaching overvalued levels, micro-cap stocks provide a more attractive buying opportunity, some experts say.

The Wall Street Journal defines micro-caps that mutual funds and exchange-traded funds invest in as stocks with market capitalization of $900 million or less, and Morningstar classifies small-cap stocks that the funds invest in as those with market cap of less than $2.9 billion.

The Russell Microcap index had a price-earnings ratio of 17, using 12-month forward earnings, as of Wednesday, the newspaper reported. That is down from 20.1 in mid-2007, a few months before large-cap stocks hit record highs.

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Micro-caps trade approximately 10 percent lower now than their pre-financial crisis valuations, Jon Eggins, a small-cap portfolio manager at Russell Investments, told The Journal.

Meanwhile, the Wilshire U.S. Small-Cap index has a forward P-E ratio of 19.5, about equal to its June 2007 high. And the Russell 1000 index of large-cap stocks stands 4 percent below its 2007 valuations, according to the paper.

"Everything has gone up, but we're not seeing micro-caps trade at the same nosebleed levels as right before the financial crisis," Doug Sandler, chief equity officer at RiverFront Investment Group, told The Journal.

"They [micro-caps] fell harder during the financial crisis, so micro-caps have had more ground to cover," Eggins noted.

Micro-cap stocks have vastly outperformed small-caps since late May, notes Barron's writer Michael Kahn. And he's not sure that's a good thing.

"Some may say that the emergence of small-stock leadership is a positive development, and generally it is," Kahn wrote.

"But there is something a little disturbing about the unquestioned superior performance by micro-caps. It smells a little of a speculative frenzy at the end of a cyclical or secular bull market."

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