Selling in the market has led to a fall in the shares of small American companies. Some investors say they are starting to see a deal.
The Russell 2000 benchmark of small-cap stocks is down 24% its November record, its decline began nearly two months before the S&P 500 index of large-cap companies. The S&P 500, down 12% over the same period, dragged lower as investors felt red-hot inflation was sticking around and the Federal Reserve would likely raise interest rates more aggressively than expected.
It is common for small-cap stocks to fall especially hard during times of economic uncertainty. Small-cap category stocks are generally considered risky investments: even in good times, many companies don’t make money reliably, and this ratio rises during periods of economic crisis.
Among small-cap stocks that struggled this year: The teen-apparel retailer
anf -9.36%
, down 41% in 2022; Burger Chain
shake Shack Inc.,
Doubt -0.21%
down 33%;
Biocryst Pharmaceuticals Inc.,
bcrx -4.61%
, down 33%; And
cubes 0.32%
down 37%.
Stock-market leadership wears off over time between the stocks of large-cap and small-cap companies. While it’s difficult to predict when the next rotation will begin, investors say some small-cap stocks have fallen so far that they now seem cheaper than stocks in larger companies.
“We basically just think that small caps have fallen a lot,” said Jason Pride, chief investment officer for private property at Glenmead.
The average market value of companies in the Russell 2000 was a little less than $1 billion at the end of April, compared to about $30 billion in the S&P 500.
If the small-cap group’s recent performance is any guide, other investors are also questioning the extent of the recent decline. Since its 2022 low on May 11, the Russell 2000 has gained 8.5% while the S&P 500 has gained 5%.
Strategists at BofA Global Research wrote in May that the Russell 2000 had already fallen substantially toward its average bearish run in times of recession, while the S&P 500 had fallen nearly half of its average bearish return.
“If bearish prospects continue to rise, both indices are likely to decline further – but historical moves suggest greater downside risk potential from current levels for small to large,” he said.
According to BofA, the Russell 2000 traded at 12.5 times its projected earnings over the next 12 months at the end of April, which is 15.4 times lower than the average since 1985. This valuation places the small-cap benchmark as the cheapest relative to the large-cap Russell 1000 since 2001.
The calculation excludes companies with no earnings, A large part of small-cap benchmarks, Unprofitable companies made up 29% of the Russell 2000’s market value at the end of April, according to a Jefferies analysis based on earnings over the past 12 months.
The lack of broad profitability is one reason why shares of small-cap companies dive at the first sign of uncertainty about the economic outlook.
“Any anticipation of an economic slowdown or geopolitical risks, people are going to shoot first and ask questions later,” said Will Naasgovitz, chief executive and portfolio manager at Heartland Advisors. “Small caps are inherently more volatile, and those stocks are under pressure right now.”
Russell 2000 S&P 500. fell ahead of In the initial COVID-19 selloff in early 2020, only to move around and lead the market higher After promising vaccine trials raised hopes of strong economic growth. More recently, small caps Omicron fades out after version The reopening put business in doubt.
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Shares of Abercrombie fell 29% in the same session last week after the retailer suffered a quarterly loss and warned of continued higher costs and slower sales growth. Shares of Biocrystal Pharmaceuticals fell 38% in a trading session in April after the company said it had halted enrollment in a set of clinical trials.
Small-cap stocks have historically struggled ahead of recessions. Outperformed in early stages of expansion, While it’s an open question as to when the US economy will enter its next recession, the ultimate lead is one reason money managers say it’s important to stay invested in the conglomerate.
Brandon Pizzuro, director of public investment at Guidestone Capital Management, said, “When you’re coming out of a recession, small-cap stocks tend to beat large-caps, and the outperformance in particular often goes well before that recession is over. That’s how it starts.”
write to karen langley karen.langley@wsj.com
Selling in major US stock indexes continued in May, although they halted last week. The WSJ’s Caitlin McCabe looks at some of the key reasons for market volatility. Photo: John Minchillo / The Associated Press
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