Thanks to rising interest rates, the usually-pricey small-growth cap stocks have become a bargain, providing a great opportunity for long-term investors, contends an article in MarketWatch. That’s an opportunity that Bradford Neuman, director of market strategy at Alger, is taking advantage of; Neuman told clients in a recent note that because small-cap growth stocks are currently cheaper than small-value equities, as well as having higher operating margins and solid balance sheets, the current market environment is an ideal one for investors.
Not since FactSet started tracking data in 1998 has the S&P Small Cap 600 Growth Index been this inexpensive, relative to the S&P 500. For the last decade, the iShares S&P Small-Cap 600 Growth ETF has been much pricier than the average forward price/earnings valuation of SPY. It’s now trading at a 63% of the S&P 500’s PE, the cheapest it has bee in relation to its large-cap counterpart. In what Neuman calls the “divergence between the market and fundamentals,” the consensus forward 12-month EPS estimate for small-cap growth stocks grew 47%, while SPY’s estimate grew 20%. Because small-cap growth investors are putting down money for returns that are years in the future, small-cap companies much more sensitive to rising interest rates. And since they’ve grown their earnings faster, their share prices have gone down faster too, the article explains.
Neuman highlighted FirstService Corp, a Toronto-based residential property management company, as an example of a small-growth cap stock opportunity. FirstService has gained significant market share over time, with their business growing by double digits through acquisitions, Neuman told MarketWatch. And though its share price has fallen 17% in the last year through the end of May, FirstService’s rolling forward EPS estimate grew by 23% in that time.