Moderately Positive on Small Caps

 
For those investors that felt like seasick passengers on a boat in the wild seas of September, the past week must have been as welcome as a dry port and a square meal.  

Green flashed across my screen for the greater part of the week as the broad market rallied 4.7%. Small caps did even better, jumping 6.2% higher. And micro-caps tacked on even more, adding 6.5% since last Thursday’s close.

The past week wasn’t all about cheap rum and romantic adventures though. There were plenty of sob stories to go around. In the small cap space, semiconductor leader Ambarella (AMBA) has short-circuited, GoPro (GPRO) has crashed and Box (BOX) has crumpled.

Large caps haven’t been immune to “oh boy” moments either. Dunkin’ Brands (DNKN) is ice cold after announcing it would shutter 100 stores, and Illumina (ILMN) failed to provide the answers the market wanted when it reduced guidance.

Illumina in particular is of interest as the stock’s 42% decline from the July 2015 high is somewhat emblematic of the persistent weakness in health care and biotech stocks. I checked in on the Fidelity Select Biotech Fund (FBIOX), one of the best in the business, and was surprised to see that the fund’s return since this time last year has been slashed from over 40% in July, to just over 6% today. That kind of drop is pretty rare in a mutual fund. Though, to be fair, the pace of gains in biotech has been so rampant that one has to know these corrections are bound to happen—prior to the decline, that fund had been up 320% over just five years.

The small cap health care sector has actually done better, holding onto a 20% gain over the past year. But it was still the weakest area of the small-cap asset class this past week, rising just 0.9%.

Small-cap investors enjoyed far superior performance in every other sector, which is why you should expect that I’ll continue to diversify Cabot Small-Cap Confidential portfolio over the coming months. Energy stocks absolutely ripped higher. The 29.5% rally is sure to draw attention as the beaten-down sector is offering up some good value plays.

My view of small caps right now is still moderately positive. I’m not pounding the table to buy everything out there, but pick your spots and your stocks carefully and you should do just fine. The simplest trade out there is the S&P 600 Small Cap Core ETF (IJR). If you buy ETFs, go with this one over Russell’s version—you’ll do far better over time.  

For yet another week, Information Tech was a standout performer, rising by 7.3%. And that’s about as good a lead-in as I can ask for to set up this week’s updates.

Tyler Laundon is Chief Analyst of Cabot Small-Cap Confidential. To read subscriber reviews of Cabot Small-Cap Confidential, click here.

This is an excerpt from Cabot Small-Cap Confidential, which features little-known stocks with big potential. It offers a limited number of subscribers the opportunity to discover overlooked, low-priced stocks that have the potential to skyrocket. This advisory is best suited to experienced investors who embrace volatility.


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