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Searching for Quality in Small-Cap Stocks
Doug has helped countless people get started on the road to financial freedom. A true Internet pioneer, he founded one of the earliest financial Websites, Investorama.com, in 1994, and co-founded NAIC’s original website in 1995. In his role as President, Doug serves as ICLUBcentral’s product manager and evangelist for tools such as myICLUB.com, MyStockProspector.com, and the award-winning Investor Advisory Service newsletter (for which he also serves as editor). Doug founded several of the tools in ICLUBcentral’s toolbox, including StockCentral, EquityResearchService.com, and the market-beating SmallCap Informer newsletter. He is the author of several books, including The Complete Idiot’s Guide to Online Investing, The Armchair Millionaire, and Investment Clubs for Dummies, and maintains his commitment to making personal finance accessible to all, through magazine articles, media appearances, webinars, and speaking engagements.
Though large-cap stocks have performed well in the last few months, research shows that higher quality companies have trailed other market segments as investors scrambled aboard riskier stocks that boasted strong rebounds after initially getting massacred by the pandemic (think travel companies), “meme stocks,” and speculative equities (such as SPACs). Investors have eschewed solid fundamental performers with their “boring” rates of return in favor of jumping on the bandwagon of headline stocks with low-quality fundamentals.
This pattern can’t last. With history as a guide, quality stocks are more than likely to come back in favor in the coming months. At the same time, more speculative investments will see their valuations fall if their fundamentals don’t improve.
With economies in the U.S. and globally beginning to open up from pandemic shutdowns, fears of an interest rate hike off the table for now, and employment picking up, there is plenty of room for stock market optimism for the rest of 2021 and into 2022.
While we are not in the business of trying to predict the direction of the market, these trends bode well for investors who continue to focus on healthy companies that have prospects for growth and that are available for purchase at reasonable valuations. Over time, this approach has proven to deliver results for disciplined investors.
Points of emphasis:
Large-cap stocks have performed well in the last few months.
Investors are taking on risks of stocks with low-quality fundamentals.
There is plenty of room for stock market optimism for smaller companies with prospects for growth and with reasonable valuations.
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