It was another tough day for investors on Tuesday, with the major averages dropping precipitously before gaining a bit back at the end of the day. A worrisome trend is developing in May, and choppy trading is even giving pros like David Tepper a little agita.
One market leading indicator, if you will, that's taking the brunt of the beating are the small caps. The Russell 2000 (^RUT) lost another 1.5% yesterday, leaving it nearly 10% down from early March. Interestingly enough, just this past week Credit Suisse issued a report on “Hunting for New Ideas in Small Caps.” The report is basically a stock screener of small cap companies, depicted in category classes like “Best in Class,” “Contrarian,” and “Value Trap.”
While there’s some recognizable names on the list like Orbitz, Smith & Wesson, and Abercrombie & Fitch, Josh Brown of Ritholtz Wealth Management, and co-author of the book “Clash of the Financial Pundits,” says digging through these names of hit or miss stocks is pure folly.
“Well there used to be a lot more sell-side research coverage of small caps back when there was such thing as second and 3rd tier broker dealers, who could make a market in these stocks, and it would be worth covering them, and everyone once in a while they’d see a banking deal.” But with market-making a thing of the past, Brown says we are in a “wild west” when it comes to covering these smaller companies because there’s not a lot of in-depth research.
While there’s nothing wrong with doing your research and investing in individual small-caps on your own, for 99% percent of people Brown says “its’ going to be really hard for them to find an edge, (A) that’s enduring, (B) that justifies not just the cost, but the time spent on this kind of research. For most people there’s really no reason to be going down that rabbit hole.”
Brown is pretty harsh in his judgment of the space, advising investors to ignore small caps all together at this point. “I don’t think there cheap…[and despite that fact that] the positive benefits of an increasing economy hit their bottom lines quicker, that’s already [priced] in the market.”