Small-cap stocks outperformed large-cap stocks. How to use charts to find buying candidates in a group | Wilnesh News
There’s been a lot of talk about the recent outperformance of the Russell 2000 Index, the small-cap benchmark. The iShares Russell 2000 ETF (IWM) has outperformed the Invesco Nasdaq-100 and SPDR S&P 500 (SPY) since the first week of July (shown below). June non-agricultural employment data released on July 5 showed that the overall data and private employment data were significantly revised compared with the data before May, and the unemployment rate was slightly higher than expected. Then on July 11, things really kicked off, with June CPI coming in lower than expected and a first rate cut from the Fed becoming significantly more likely. Lower interest rates are seen as most beneficial to domestic companies because they obtain financing not from the corporate bond market but directly from banks that set borrowing costs based on prevailing interest rates. Looking again at the same chart of SPY, QQQ, and IWM, with the percentage change set to July 5th, we see that IWM outperformed SPY and QQQ by a wide margin (+3.87% vs. -1.41% and -8.20%) at Inside Edge Capital for me The thing about client investing is that the average level is suitable for…the average investor. I think we can do better. Let’s dig into the components of the Russell 2000 Index to see who’s leading and who’s lagging since the July 5 turning point. Real estate, finance, utilities and healthcare lead in that order. I wrote about this on CNBC PRO in March and expressed caution because 43% of Russell 2000 companies had negative earnings in the trailing 12 months. Yes, lower borrowing costs will benefit small-cap companies, but this is only the first cut (hopefully of several) and costs are still much higher than pre-pandemic. Let’s see who actually gained and was able to sustain the rally after the initial glow of the new rate cuts faded. What to Watch in Small Caps An important component of the Russell 2000 Index based on market capitalization representation is healthcare, accounting for 18.7%. However, as you can see in the chart below, the Healthcare sector has been by far the worst performer in terms of trailing twelve month earnings, with the sector overall earning -$2.094. Financial stocks’ earnings per share in the trailing 12 months totaled $2.33, compared to the same 18.0% of financial stocks in the Russell 2000 Index. This is what we are looking for. Take a look at two names I follow in the capital markets: Piper Sandler (PIPR) and Hamilton Lane (HLNE). I don’t own them but I’d like to add them. I currently own Jefferies (JEF) and Ares Management (ARES) in our portfolio. It’s also interesting to note that utility stocks accounted for 19.29% of Russell 2000’s total earnings per share, but they only account for 2.6% of the total market capitalization. If the Fed adopts a dovish tone after the first rate cut, I will buy quality stocks. The final group that I find interesting is consumer discretionary, which has seen some pretty impressive gains in the S&P 500 in recent weeks. Since that critical turning point on July 5, the cap has risen just 1.64%. I don’t usually like to do “catch up” trades, but there may be some opportunities there. – Todd Gordon, founder of Inside Edge Capital, LLC, reveals: (Gordon personally and his wealth management firm, Inside Edge Capital, own JEF, ARES. Charts shown are MotiveWave and Excel.) All opinions expressed by CNBC Pro contributors are solely their own Their personal views and opinions do not reflect the opinions of CNBC, NBC UNIVERSAL, its parent company or affiliates, and may have been previously disseminated by them on television, radio, online or other media. The above is subject to our Terms and Conditions and Privacy Policy. This content is for informational purposes only and does not constitute financial, investment, tax or legal advice or a recommendation to purchase any security or other financial asset. The content is general in nature and does not reflect any individual’s unique personal circumstances. The above may not apply to your particular situation. Before making any financial decisions, you should strongly consider seeking advice from your own financial or investment advisor. Click here to view the complete disclaimer.
