MW This group of stocks should trounce the S&P 500, according to a veteran money manager
By Philip van Doorn
U.S. stocks are trading at high valuations relative to historical averages, pointing to a long period of weak performance
Mark Cooper of MAC Alpha Capital Management expects small-cap value stocks in developed markets as a group to outperform the S&P 500 by a wide margin over the next 10 years.
A bull market is typically at or near a record high. Relative valuations can provide more useful warnings to investors of whether or not a market is overheated, and they may also highlight attractive entry points.
According to Mark Cooper, the chief investment officer of MAC Alpha Capital Management in Tampa, Fla., investors need to be wary of stocks that are priced high relative to companies' revenue. He also sees an opportunity in small-cap international value stocks for significant outperformance relative to the S&P 500 SPX for the next 10 years.
Valuation warning
Investors typically focus on forward price-to-earnings valuations for large-cap stocks. These are current prices divided by consensus earnings-per-share estimates for rolling 12-month periods.
But you can only have a forward P/E ratio if a company is expected to be profitable. The most commonly cited and benchmarked small-cap index is the Russell 2000 RUT, which includes hundreds of unprofitable companies.
Another useful valuation metric is price to sales, and if we do that on a trailing 12-month basis, we can focus on actual results and not worry about estimates that aren't available for many small-cap companies.
The S&P 500 trades at a trailing price/sales ratio of 3.21, which is close to its record high of 3.26 set in August 2021, according to data supplied by FactSet. And the large-cap U.S. benchmark's average trailing price/sales ratio over the past 20 years has been 1.92, while its 10-year average valuation has been 2.42. So by this measure, the S&P 500 trades at a 67% premium to its average valuation over the past 20 years and a 35% premium to its 10-year valuation.
The S&P 500 is weighted by market capitalization, which means it is highly concentrated. The SPDR S&P 500 ETF Trust SPY, which tracks the index by holding all 500 stocks, is 20.9% weighted to its top three holdings - Nvidia Corp. (NVDA), Microsoft Corp. $(MSFT)$ and Apple Inc. $(AAPL)$. If we throw in Amazon.com Inc. (AMZN) and Meta Platforms Inc. (META), the portfolio concentration for five stocks comes to 27.8%.
You might be curious to see price-sales ratios for these five:
Company Ticker Trailing price/ sales 10-year average trailing price/ sales Premium to 10-year average valuation
Nvidia Corp. NVDA 23.43 16.93 38%
Microsoft Corp. MSFT 12.94 9.16 41%
Apple Inc. AAPL 8.56 5.43 58%
Amazon.com Inc. AMZN 3.62 3.24 12%
Meta Platforms Inc. META 10.08 9.54 6%
Source: FactSet
Amazon is the cheapest among these five stocks on a trailing price/sales basis and trades only slightly above the valuation of 3.21 for the S&P 500. Three of the five companies trade at high-double-digit premiums to their 10-year average valuations.
During an interview with MarketWatch, Cooper said an indication of "speculative froth in the market" was that there were about 300 U.S. stocks trading at valuations of at least 10 times sales, compared with about 400 in March 2000, as the dot-com bubble was about to burst.
"The difference is today there are only half as many public companies" in the U.S., he said.
According to data supplied by FactSet, the most expensive stock by this measure in the S&P 500 is Palantir Technologies Inc. (PLTR), which trades at a trailing price/sales ratio of 98.5. The stock had more than doubled for 2025 through Wednesday.
Another stock trading at a high valuation is Strategy Inc. (MSTR), formerly known as MicroStrategy, which trades at a trailing price/sales ratio of 219.1. The company over recent years altered its business strategy to focus on holding bitcoin (BTCUSD). Strategy's bitcoin holdings were valued at $64.4 billion as of June 30, accounting for most of its total assets of $64.8 billion. The stock closed at a market capitalization of $93.6 billion on Wednesday, showing that the company was priced at a 44% premium to its assets and a 45% premium to its June 30 bitcoin holdings. The stock fell 18% from the end of June through Wednesday.
Turning to small-cap stocks, Cooper said that a "basket" of companies with price/sales valuations of 10 or higher "tends to be a fertile ground for underperformance."
He added: "Potentially in a more rational world where capital is more expensive, it will be difficult for these businesses."
So he tends to look within the U.S. small-cap space for short-selling opportunities.
"It is clear from our data that there is a greater percentage trading at greater valuations and they have a lot of leverage. The ones we choose to short tend to make no money and have other issues," Cooper said.
The opportunity
Cooper made three cases that led him to recommend exposure to small-cap value stocks in developed markets outside the U.S.
First, international stocks in developed markets outside the U.S., as represented by the MSCI EAFE Index XX:990300, are priced low relative to the S&P 500. Here is a 20-year chart showing that price relationship:
Using data for a 55-year period through June 30, Cooper estimated that the MSCI EAE Index would "have to grow 27% more than the S&P 500 for five years just to get back to the 55-year average" relative valuation.
"Historical mean reversions have typically been faster than five years and [have] overshot the mean," he added.
Second, value stocks are cheaply priced relative to growth stocks. This time we are showing the price of the MSCI AC World Value Index relative to that of the MSCI AC World Growth Index:
Finally, Cooper said that investors were underweight small-cap stocks, with a 4% allocation in the U.S. market, compared with a 7.5% average. A reversion to that mean would mean significant outperformance for small caps relative to large caps, he said, adding that the trend had already started.
Together, the three trends point to small-cap international value stocks as a long-term opportunity for investors, because this group trades at its cheapest level relative to the U.S. stock market "for at least 50 years," he said.
Three approaches to small-cap international value stocks
At MAC Alpha Capital Management, Cooper is running hedge-fund strategies that encompass long and short positions in stocks.
For investors looking for low-cost broad approaches to small-cap value stocks in developed markets outside the U.S., here are three exchange-traded funds that FactSet lists as direct competitors in the space:
-- The Avantis International Small Cap Value ETF AVDV has $11.6 billion in assets that are actively managed. The fund holds 1,436 stocks of small-cap companies in developed markets outside the U.S. The holdings are weighted by market capitalization, as adjusted by the fund managers per their value-scoring methodology designed to identify companies "trading at low valuations with higher profitability ratios," according to Avantis Investors. The fund was established in September 2019 and its annual expenses come to 0.36% of assets under management. That means the fees would total $36 a year for a $10,000 investment. This fund has a four-star rating (out of five) within Morningstar's U.S. Fund Foreign Small/Mid Value category.
-- The $3.4 billion Dimensional International Small Cap Value ETF DISV has been the best performer over the past three years among the three funds listed here. It is also actively managed and holds 1,478 stocks. The fund was established in March 2022 and has an expense ratio of 0.42%. It is also rated four stars by Morningstar.
-- The iShares International Developed Small Cap Value Factor ETF ISVL holds 502 stocks as it tracks an index that screens stocks in developed markets outside the U.S. and South Korea for low valuations with additional filters for liquidity, price volatility and levels of debt relative to assets. The fund has a three-star rating from Morningstar, with an expense ratio of 0.30%. ISVL was established in March 2021. It has $48 million in assets under management.
The three ETFs have all outperformed the MSCI EAFE Small Cap Value Index, the full MSCI EAFE Small Cap Index and the SPDR S&P 500 ETF Trust over the past three years through Wednesday:
Click on the tickers for more about the indexes, stocks and ETFs in this article.
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-Philip van Doorn
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September 04, 2025 12:56 ET (16:56 GMT)
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