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Feb. 17, 2012, 12:01 a.m. EST
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By Rachel Koning Beals
CHICAGO (MarketWatch) "” This spotty economic recovery has fooled more than a few: Bad days for bears; good days for champions of small-cap stocks, whose strong rebound just may continue.
In that constant churn between "risk on" and "risk off," investors have been getting a little more adventurous and small-caps are delivering. The Russell 2000 Index /quotes/zigman/2759624 RUT -0.15% rose 7% last month, marking its best January since 2006. The Fed's pledge for low interest-rates certainly helps small-cap firms, which often have more trouble borrowing than their bigger rivals.
MarketWatch.com columnist Rex Nutting makes a stop on Mean Street to make the point that despite steadily improving employment numbers in the U.S., we're only halfway through the pain and suffering. Photo: AP.
Most economists think the U.S. economy will chug along, with several looking for 2012 GDP growth of around 2% or a little better. That's not bad for a base case, considering global pressures and timid executives and consumers still smarting from the financial crisis and recession.
The small-cap story is playing out in earnings results. Four of every 10 small-cap companies are beating Wall Street expectations so far this year, and 54% have topped the sales estimate in recent reporting rounds, according to Bank of America Merrill Lynch.
But have small-cap stocks come too far, too fast?
"We are sticking with our [small-cap] return target of 11.5% for 2012 despite the strong gains to start the year, as the U.S. economy is expected to slow in the back half of the year but earnings expectations do not reflect this trend," said Steven DeSanctis, head of U.S. Small-Cap Strategy, at BofA Merrill, in a recent research report.
"Volatility will rise thanks to Europe, the U.S. presidential election, new fiscal policies, and the Middle East," he added. "This could put a damper on performance going forward."
/quotes/zigman/2759624 RUT 828.68, -1.28, -0.15%
Yet Jeffrey Schwartz, senior portfolio manager of Pyxis Small-Cap Equity Fund /quotes/zigman/4149225 HSZAX -0.31% , argues that small-cap is exactly where to position a portfolio for domestic economic growth because the space has less exposure to troubled international areas than both midcaps and large-caps.
Clearly there may be a few snags to the small-cap thread. That said, with the required caution also considered, here's a short list of economic catalysts and market sectors where improved conditions should bode well for small-cap stocks:
1. Banking and creditThere's so much bad news priced into financial shares, "it sure wouldn't take much to reignite fundamental improvement," said Lawrence Creatura, manager of the Federated Clover Small Value Fund /quotes/zigman/542255 VSFAX +0.09% . "Expectations are subterranean. Nobody expects the environment to get much better here soon."
With pessimism about the economy still prevalent, Creatura is looking closely at smaller banks with a regional focus.
"Pick your region, your management team, the type of lending you prefer, and track lending history," Creatura said. "Small-cap financials have a huge advantage in this environment to the conglomerate banks." For example, his fund includes Ocwen Financial Corp. /quotes/zigman/1496154/quotes/nls/ocn OCN +0.58% .
/quotes/zigman/2759624 Add RUT to portfolio RUT Russell 2000 Index (Nasdaq) 828.68 -1.28 -0.15% Volume: 0.00 Feb. 17, 2012 10:30p var embeddedchart884247603Chart = new EmbeddedChart('#embeddedchart884247603', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:RUT'); jQuery.data($('#embeddedchart884247603').get(0), 'embeddedchart', embeddedchart884247603Chart); /quotes/zigman/4149225 Add HSZAX to portfolio HSZAX Pyxis Small-Cap Equity Fund Cl A $ 12.73 -0.04 -0.31% Volume: 0.00 Feb. 18, 2012 var embeddedchart1321389726Chart = new EmbeddedChart('#embeddedchart1321389726', NormalChartStyleNoDecimals, 240, 80, '6mo', '1dy', null, null, null, 'US:HSZAX'); jQuery.data($('#embeddedchart1321389726').get(0), 'embeddedchart', embeddedchart1321389726Chart); /quotes/zigman/542255 Add VSFAX to portfolio VSFAX Federated Clover Small Value Fund Cl A $ 21.43 +0.02 +0.09% Volume: 0.00 Feb. 18, 2012 var embeddedchart1321387680Chart = new EmbeddedChart('#embeddedchart1321387680', NormalChartStyleNoDecimals, 240, 80, '6mo', '1dy', null, null, null, 'US:VSFAX'); jQuery.data($('#embeddedchart1321387680').get(0), 'embeddedchart', embeddedchart1321387680Chart); /quotes/zigman/1496154/quotes/nls/ocn Add OCN to portfolio OCN Ocwen Financial Corp. $ 15.69 +0.09 +0.58% Volume: 2.00M Feb. 17, 2012 4:00p var embeddedchart1891690206Chart = new EmbeddedChart('#embeddedchart1891690206', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:OCN'); jQuery.data($('#embeddedchart1891690206').get(0), 'embeddedchart', embeddedchart1891690206Chart); //$(document).ready(function() { var storywidth = $('#mainstory').width(); var maxwidth = storywidth; $('#maincontent pre').each(function (index, value) { var thiswidth = $(value).width(); if (thiswidth > maxwidth) maxwidth = thiswidth; }); var offset = maxwidth - storywidth; if (offset > 0) { var margin = 13; var blanketwidth = $('#blanket').width(); var contentwidth = $('#maincontent').width(); $('#blanket').width(blanketwidth + offset + margin); $('#maincontent').width(contentwidth + offset + margin); $('#mainstory').width(storywidth + offset + margin); } //}); Page 1 Page 2 var OB_permalink= 'http://www.marketwatch.com/story/5-big-game-changers-for-small-cap-stocks-2012-02-17'; var OB_Template="marketwatch"; var OB_widgetId= 'AR_1'; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ""; document.write(str); } Comments on this story 4 Comments Most Popular Market SnapshotGreece, U.S. data to dictate market's direction
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Jobs, Nasdaq in focus In a short trading week, first-time jobless claims, the Nasdaq's drive toward 3,000 and Greece's debt dealings will be the hot topics for investors. /conga/kiosk/video.html 193173 1329437100000 1329783000000The Trading Deck
Mary Anne & Pamela Aden U.S. stocks and gold going higher U.S. stocks and gold are leading the way. In fact, these are our top picks for the months ahead and they're looking good. Here's why ... /conga/kiosk/trading-deck-11.html 193026 1329437100000 1329783000000The Trading Deck
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Avi Gilburt Ride the Elliott Wave to amp gains A stock has seemingly gone straight up with no end in sight. It caught your attention "” and the attention of many other investors as well. /conga/kiosk/trading-deck-6.html 193038 1291266000000 1291266000000Tools and Data
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