The Case For Small Caps

In his latest column for Seeking Alpha, Validea CEO John Reese lays out his case for not ditching small caps despite their weak recent performance.

“For one thing, while we didn’t have one last year, corrections in small-caps are a regular occurrence,” Reese notes. “From 2004 through 2012, the Russell 2000 corrected 15 times, declining an average of 16.3%, according to USA Today (citing Russell data). Yet since 2004, the small-cap index is still beating the S&P 500.”

In addition, he says, small caps, in particular small cap value stocks, have long been an exceptional performer. “Consider the data,” he writes. “From 1927 through 2009, U.S. large-cap growth stocks averaged a 9.08 percent annual compound return, according to the data of Dartmouth College professor and noted stock researcher Kenneth French. Small-cap growth stocks, meanwhile, averaged 9.23 percent, and large-cap value plays fared even better, averaging 11.21 percent. But well ahead of the pack are small-cap value picks, which averaged a 14.17 percent return per year.”

Reese looks at why small cap value stocks have been such a good performers over the long term, and he offers 5 small cap value picks that his guru-inspired strategies are high on right now.