Tags: small-cap | stocks | overvalued | large-cap

WSJ's Light: Small-Cap Stocks Look Vastly Overvalued

By    |   Monday, 07 April 2014 08:53 AM

Small-capitalization stocks appear to have risen far beyond fair value, says Joe Light of The Wall Street Journal.

Small-cap stocks have vastly outperformed their larger brethren during the bull market of the past five years. Since the S&P 500 hit its low March 6, 2009, that index of large-cap stocks has advanced 180 percent, far behind the 236 percent increase registered by the Russell 2000 index of small stocks.

As for price-earnings (P/E) ratios, Doug Ramsey, chief investment officer at the Leuthold Group, tells The Journal that for determining when to buy and sell small-cap stocks, it's best to use an average of five years of earnings.

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By that measure, the median small-company stock has a P/E ratio of 28.4, far above the historic median of 21.4, according to Leuthold.

Large-cap stocks have a much lower P/E of 21, close to the historical median. The 34 percent premium of small-cap stocks' P/E ratio relative to that of large-caps dwarfs the 2 percent median premium since 1986, The Journal reports.

"No matter how you slice the data, small caps look expensive," Steven DeSanctis, a small-cap strategist at Bank of America, tells the paper.

Others agree. "If there's a bubble anywhere in the stock market, it's in small-cap," Matt Kadnar, a portfolio manager at investment management firm GMO, tells InstitutionalInvestor.com. Measured by P/E ratios, profit margins, growth and income, the Russell 2,500 index of small-cap and mid-cap stocks is more expensive than any point since the early 1990s, Kadnar says.

GMO predicts that small-cap stocks will return negative 5.1 percent after inflation annually during the next seven years, compared with negative 1.6 percent for large-cap stocks, according to Institutional Investor.com.

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Small-capitalization stocks appear to have risen far beyond fair value, says Joe Light of The Wall Street Journal.
small-cap,stocks,overvalued,large-cap
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2014-53-07
Monday, 07 April 2014 08:53 AM
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