By Charley Grant
How strong is investor enthusiasm for artificial intelligence and crypto? Two stocks tied to those themes -- Super Micro Computer and MicroStrategy -- are giving even the long-suffering Russell 2000 a boost.
Super Micro, a server maker known more commonly by its brand name Supermicro, is up 257% this year as demand surges for servers that power generative AI capabilities in data centers. MicroStrategy, meanwhile, has advanced 154% as the value of its cryptocurrency holdings has soared. Those returns have dwarfed hot stocks like Nvidia, which has gained 80%.
The "Micro" stocks, which are now the two largest in the small-cap stock index, have a combined market value of $87 billion, including $60 billion added this year. Together, they accounted for more than a third of the Russell 2000's 5.2% return in the first quarter, according to data from LSEG.
But the jolt is unlikely to last, even if the stocks keep rising. Both Micros are far larger than the typical Russell 2000 stock, which had a median market value of about $900 million at the end of February. They will remain in the Russell 2000 until at least June when the index undergoes its annual rebalancing and they are expected to depart. The rebalance will likely result in the removal of companies with market values larger than $7.6 billion, according to Steven DeSanctis, small and midcap U.S. equity strategist at Jefferies.
Until then, the small-cap index has some jumbo-size tenants.
Supermicro accounted for nearly 2% of the Russell 2000 and for nearly 4% of the Russell 2000 growth index at the end of the first quarter. MicroStrategy had weightings of just under 1% and 2%, respectively.
Supermicro "is by far the biggest single-stock weight ever in the index, " said DeSanctis, whose data stretches back to 1985.
Both Supermicro and MicroStrategy are decades-old companies that have suddenly found themselves in the limelight. Demand for Supermicro's servers surged alongside that of Nvidia's graphics-processing units needed to power generative AI programs, and the stock has surged in part because Wall Street analysts expect its sales to boom. Revenue is expected to top $22 billion in the 12 months that end in June 2026, more than triple last year's tally.
MicroStrategy also has a legacy tech business, but shares have surged because its leveraged bet on bitcoin has paid off.
Led by Executive Chairman Michael Saylor, the company has tapped capital markets to steadily buy more cryptocurrency since 2020, winning over fans in online investor forums like Reddit in the process. As of March it held more than 214,000 bitcoins at an average purchase price of about $35,160. Bitcoin prices are hovering around $66,000, up about 55% this year.
The stock should keep rising if cryptocurrencies continue their rally, and analysts expect revenue to increase by 18% over the three years that end in 2026 to $583 million.
Small-cap stocks needed the assist. While other major stock indexes are notching repeated all-time highs, the Russell 2000 sits 15% below its record from November 2021. It has lagged behind the Russell 3000, which includes large stocks, over a one-, three-, five- and 10-year horizon.
Although the Russell 2000 has returned 20% over the past six months, it still lagged behind the S&P 500 by 3 percentage points.
Higher interest rates are one reason the index has trailed. The benchmark 10-year Treasury note yield settled at 4.354% Wednesday, near its highest level since November.
But some investors say that is a reason for optimism since the Federal Reserve is expected to cut rates later this year.
Nearly a quarter of the index consists of financial, real-estate and utility stocks, which have all fared poorly. Higher rates make dividend-paying stocks like utilities less attractive, and they drive up borrowing costs for banks and real-estate companies.
The KBW Nasdaq Regional Banking Index is down 11% in 2024, after nosediving last year.
"These were sectors that were the most hurt by the constriction of capital, and they're most likely to benefit from a reduction to rates," said John Mowrey, chief investment officer at NFJ Investment Group.
The value stocks within the Russell 2000 trade at 1.4 times their net worth, which he said marks the biggest discount relative to the S&P 500 since the late 1990s.
"The Mag Sevens of the world don't need a lower fed-funds rate to borrow, " Mowrey said.
Write to Charley Grant at charles.grant@wsj.com
(END) Dow Jones Newswires
April 04, 2024 05:30 ET (09:30 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments