Times for Sticking Closer to Quality

As we prepare to head into the last three weeks of the 2015 trading season, we have a leaner and meaner group of stocks in Cabot Small-Cap Confidential. After a tumultuous 2015, it’s increasingly clear that the market is not rewarding stocks that lack a combination of at least modestly reliable cash flow and large market opportunities (that can be capitalized on sooner rather than later). The market has become impatient, and unwilling to stand by highly speculative stocks that have compelling stories, but financial statements that are less so.

These are the times during which small-cap investors are wise to stick closer to quality (which can have widely differing meanings in the small-cap universe, depending on who you ask). The time will come again when money can be made in the lower quality, unproven businesses—and when it does, we will capitalize. But this is not that time. So we’re sticking with what will make money right now, and for the foreseeable future.

I’ll review 2015 and get into forecasts for 2016 in upcoming updates. For today, suffice to say that this year has been characterized by a lot of ups and downs that, at the end of the day, amounted to a relatively unchanged market. Large caps are flat on the year and small caps are down by 2.1%. In both asset classes, growth has outperformed by a wide margin (up 5% for large caps and up 3.4% for small caps) as value stocks, largely led by energy, have declined between 5.1% (large caps) and 7.3% (small caps).  

Next week is likely to bring a watershed moment to the markets as the Fed’s meeting on Tuesday and Wednesday is likely to bring the first rate increase in many years. With consumer spending and employment figures looking better and better, and the market expecting one rate increase this year and a couple more next, it seems like the time has come. Broadly speaking, periods of rising rates are good for stocks, including small caps.

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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