Now is the time for investors to dive into small-cap stocks, according to Wells Capital's Jim Paulsen
In an investment commentary Paulsen, Well Capital's chief investment strategist, says small caps have been down so long that circumstances are finally turning in their favor.
"Indeed, small-cap fund flows have been paltry in the last few years leaving many investors significantly under exposed to small-cap stocks," he wrote.
Additionally, the relative price-earnings multiples for small caps are now the lowest they have been since the bull market began, Paulsen noted, which could help set up an overdue snapback.
Moreover, he added, "Historically, small-cap stocks have done poorly during periods of disinflation and much better during years of re-inflation. We expect the deflation scare of 2014 to give way to a 'global economic bounce' this year which should be much more hospitable for small company stocks."
Paulsen predicted small-cap stocks, given their recent underperformance, could do well even in an environment in which the Federal Reserve begins to normalize interest rates, a process the central bank has suggested could commence in 2015.
"Investors should consider augmenting exposure to an asset class which is currently under-owned and significantly out of favor, which has recently declined to its cheapest relative valuation of the recovery and which is likely to soon begin enjoying a much more hospitable economic environment (i.e., re-inflation)."
The more attractive valuations of small company stocks versus large stocks are helping small cap exchange-traded funds (ETFs) move higher, ETF Trends
reported. For instance, the iShares Russell 2000 ETF is up 5.2 percent in the last three months, while the large cap SPDR S&P 500 ETF was up only 2.8 percent during the same time period.
ETF Trends said a recent Bank of America Merrill Lynch survey found the proportion of global fund managers who think large stocks will outperform small stocks fell below two-fifths.
Small-cap stocks are the province of the Nasdaq, the exchange where many more small company shares are listed relative to the NYSE.
The Nasdaq is approaching the 5,000 mark for the first time since 2000, and USA Today
noted ominously that the last time it hit that level, the Internet bubble popped and the tech boom melted away.
After briefly surpassing the 5,000 level back then, the Nasdaq was down 17 percent one month later, off 23 percent in six months and had sunk a painful 62 percent one year later.
"At the bottom of the bear market in October 2002 the Nasdaq was down a whopping 78 percent," USA Today noted. "Of course, the leading tech companies now generate billions in earnings and cash flow, a far cry from the money-losing dotcom companies that were all the rage with investors back then."
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