Smaller companies have been increasing capital expenditures, which would allow them to capitalize off an expanding economy. Small-caps are also raising cash returns to shareholders. Additionally, small-capitalization stocks are more likely to benefit from merger and acquisition activity. And the technicals look compelling.
“The upside target based on this consolidation is above 1320 which represents the 161.8% Fibonacci extension of the entire correction from last year. This represents around 10% from current levels. Risk management-wise I don’t see any reason to be long if we are below all of this overhead supply from the past year. But above it and we want to be all over it. The best part is how well-defined the risk becomes upon an upside resolution,” adds Parets.
Small-cap naysayers are apt to point to high valuations as a headwind. Despite falling behind large-cap shares in 2014, fund managers and analysts are warning that small-cap stocks are trading at valuations above long-term averages, reports David Randall for Reuters.
Steven DeSanctis, an analyst at Bank of America Merrill Lynch, believes that Russell 2000 companies look expensive relatively to historical averages as the trailing price-to-earnings ratio of the Russell 2000 hovers around 22.7, or 40% more than its long-term average of 16.2. [Small-Cap ETFs Look Pricey]
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of IWM.