A variety of research has shown that small-cap stocks outperform large-caps during the very long term — the last 88 years, for example.
But for shorter periods of time, small-caps can underperform. For example, the Russell 2000 index of small-cap stocks has trailed the Russell 1000 index of large-cap stocks during the past 10 years, Mark Hulbert, editor of Hulbert Financial Digest, writes in Barron's
Mid-caps have been the top dog during that period.
Still a new study by Andrea Frazzini, Cliff Asness, Ronen Israel, Tobias Moskowitz and Lasse Pedersen of AQR Capital Management finds that small-cap stocks do carry an advantage when sorted for "quality," Hulbert notes
In other words, among stocks of similar "quality," small-cap outperforms large-cap. And how do the researchers measure quality?
Profitability, profit growth, low stock return risk, stability of earnings, high payout and a conservative investment policy.
So what should you invest in if you want to invest based on the new research? Hulbert recommends the following small- and micro-cap stocks: FutureFuel (FF), Comtech Communications (CMTL), EPIQ Systems (EPIQ), Scholastic (SCHL) and Owens and Minor (OMI). However, Owens and Minor and EPIQ Systems are the only stocks that are recommended by any of the several hundred advisors tracked by the Hulbert Financial Digest who have beaten the market during the past 15 years.
Joe Craigen, portfolio manager for the GW&K Investment Management's small-cap growth strategy, is bullish. "Small-caps are due for some catch-up," after lagging large-caps last year, he tells USA Today
To be sure, some investors are worried that small-cap stocks are overvalued after outperforming large-caps from 2009 until last year. The Russell 2000 had a trailing price-earnings ratio of 58.58 Friday, compared to 19.71 for the S&P 500, according to Birinyi Associates.
"Small caps are still challenged from a valuation standpoint," Scott Clemons, chief investment strategist at Brown Brothers Harriman Private Banking, tells USA Today.
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