Big Returns with Small Stocks

The S&P 500, an index measuring the performance of 500 of the largest American companies, soared over 10 percent in the first quarter of 2013.  But even better returns were seen among small-capitalization (“small cap”) and microcap stocks.  While there is no precise definition of large, mid, and small cap stocks, many people consider the minimum market capitalization thresholds of these categories to be $10 billion, $2 billion, and $250 million, respectively.  Anything below $250 million is often termed “microcap.”  Market capitalization is simply the number of outstanding shares multiplied by the stock price.

Winners in the first quarter include Aegis Value Fund (stock ticker: AVALX), which returned almost 17 percent for the quarter.  The fund focuses on small value stocks.  Value stocks are those that appear to be undervalued based on fundamentals such as price-to-earnings ratio or price-to-book ratio.  They are often “beaten down” stocks and may carry substantial debt.

Other winners of note include Pacific Advisors Small Cap Value (PASMX), up 23.5 percent;  Bridgeway Ultra-Small Company fund (BRUSX), up 19.4 percent; and Fidelity Japan Smaller Companies (FJSCX), up a sparkling 26 percent.

Over the long term, small stocks are expected to provide better returns than large stocks, but the higher expected return comes at the price of increased risk.  Smaller stocks tend to be more volatile and small companies often do not have strong enough balance sheets to survive an economic downturn.  In addition to their potential to provide high returns, small cap and microcap stocks can offer diversification benefits when added to a portfolio of large cap stocks and bonds.

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