Is Now the Time for Small Caps?

History is very clear on the fact that small caps outperform larger stocks. 

This happens because smaller companies on average have higher earnings growth which translates to superior stock returns. 

So why have large caps beaten their smaller peers for the past 5 years? 

Short answer = Magnificent 7

These stocks have been a veritable “Easy Button” for investors. 

As tech companies on the forefront of AI they are experiencing the most growth. And as some of the largest companies they also seem like a safe haven. 

Add it altogether and you understand the ongoing dominance of large caps. But as this valuation chart shows, that party should be coming to a close with small and mid caps leading the way: 

Here we see that Mega Caps are obscenely overvalued on any historical basis and will likely be underperformers in the years ahead til rectified. 

In fact, I would say this is very much akin to the dot.com bubble of the late 1990’s. (More on how to deal with this bubble at the bottom of today’s article). 

Large Caps overall are on the high side of historical norms. Not quite a bubble yet...but hard to make a case for it to move much higher. 

Gladly we find that small and mid caps are not just a better value than their large cap peers. They are also attractively priced versus the long term averages. 

This points to these two groups being solid outperformers going forward. In fact, that outperformance seems to have already started the past few months:

Add up all the above and you understand why I have been pounding the table for this long overdue rotation to small caps.

Again, that party may have finally started in August and should keep going for a while as small caps would have to outperform by 37% to match the current valuation of large caps.

This means there is plenty of time to shift your portfolio towards small caps which should strongly outperform in the months, and probably, years ahead. 

Where to Find the Best Small Caps Now?

We have multiple resources on WallStreetZen.com to point you towards depending on what level of membership you have. 

Free Members = “Small Cap Growth” Stock Ideas List

234 interesting stocks appear on this pre-built screen on the site. You can use some of the screening tools to narrow down further. 

Premium Members = “All A Rated Stocks”

This stock idea screen starts with all 214 A rated stocks according to the stringent quant analysis run daily by the Zen Ratings model. Yet quickly we can narrow down to 107 small cap stocks by selecting those under $2 billion market cap. 

Best Solution Overall = Zen Strategies = Top 7 Small Cap Stocks 

Our coveted Small Caps strategy uses the Zen Ratings to dial into only the top 7 small caps at any time. 

This proprietary strategy, part of our fast growing Zen Strategies service, has generated an impressive average annual return of +38.12% going back to 2003. 

Even more impressive is the +78.98% gain this past year. 

I featured the Small Caps strategy, and the current top 7 stocks, in my latest presentation that you can watch now: 

Should You Fear THIS Stock Market Bubble? > 

As shared above with the obscene Mega Cap valuations…indeed we are in the midst of another stock market bubble thanks to the dawning of the AI revolution. 

There is reason for excitement with AI. But that is becoming “irrational exuberance” which sets off a chain reaction that leads to devastating losses in the years ahead as the bubble implodes. 

Gladly we can learn from history to avoid these losses. Plus we can shift to the stocks most likely to rise. 

Those being healthy growing companies at reasonable valuations…precisely the kind of stocks that are found in our Small Cap strategy. 

Please watch this timely presentation below to learn how to invest in the wake of this new bubble. Plus how to get those top 7 small cap stocks now. 

Should You Fear THIS Stock Market Bubble? > 

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)

Editor-in-Chief of WallStreetZen

Want to get in touch? Email us at news@wallstreetzen.com.