MW 10 small-cap stocks to play the postelection rally
By Mark Hulbert
Now is the time to be choosy - it's likely that some individual small caps have gotten way ahead of themselves
Which small-cap stocks are the best buys?
I ask because small-cap indexes have been on a tear since last week's election, with the small- and midcap dominated Russell 2000 RUT index nearly doubling the return of the large-cap dominated S&P 500 SPX. From the close on Election Day to Friday's close, the Russell 2000 gained 6.1%, versus 3.7% for the S&P 500.
However, despite this latest burst and others like it over the past several years, the small-cap sector has significantly lagged behind broad market indexes. Year-to-date, for example, the Russell 2000 index is still more than 7 percentage points behind the S&P 500. Over the last decade, it has lagged behind by nearly 5 annualized percentage points, according to Morningstar data.
Some analysts think that last week's small-cap strength is more than just a flash in the pan, however. For example, according to Sam Stovall of CFRA Research, the small-cap sector as a whole has performed well in past years in which the Republican Party controlled the White House and both houses of Congress. Stovall reports that in years since 1980 in which there was this Republican trifecta, the Russell 2000 gained 14%, outperforming the S&P 500. Since the Republican party seems poised to win a majority of seats in the coming House of Representatives, this precedent bodes well for the small caps.
Nevertheless, it's seems likely that some individual small caps have gotten way ahead of themselves, as Morgan Stanley's Mike Wilson warned over the weekend. Wolverine World Wide Inc. $(WWW)$, to pick one example of a soaring small-cap stock, gained 41.8% from Wednesday through Friday of last week, according to FactSet - despite the absence of virtually any news stories on this manufacturer of casual footwear like Hush Puppies. Animal spirits are alive and well in the market, which means that the average stock is vulnerable to big drops when those spirits evaporate.
That's why now is the time to be choosy. To get an idea of which small-cap stocks may be best poised to perform well going forward, I turned to the investment newsletters whose performances are tracked by my performance-auditing firm. I started with all stocks currently recommended for purchase by at least two of these newsletters and whose market caps are no bigger than the largest one in the Russell 2000 index. The 10 stocks that emerged are listed in the table below.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
-Mark Hulbert
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November 11, 2024 13:17 ET (18:17 GMT)
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