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Chuck Royce Discusses Small Caps

Ian Wyatt

Small cap stocks have more than come into their own in the three plus decades since the legendary small cap guru Chuck Royce revealed his potential to the world of the investing. According to Royce, today there are more than 3,100 U.S. companies identified as micro-cap with market values of up to $500 million; more than 1,100 small-cap with market values between $500 million and $2.5 billion.
That may seem like a lot, but when you add in foreign small to micro cap company stocks the market inflates to more than 15,000 companies in developed nations. As a result of the growing market and more importantly, the exceptional opportunities that may lay ahead, Royce decided to launch three new international funds.

Royce believes that small investors have an edge with small cap stocks because "the small-cap asset class is highly inefficient and therefore investors of any size have return advantage potential," he stated in a recent interview with distinguished financial journalist Consuelo Mack. "The sheer size of the universe, both here and abroad, lends itself to significant return potential," Royce continued. "The higher level of volatility that characterizes the small-cap universe is also a benefit because it gives investors opportunities on both the buy and the sell side."
As Consuelo Mack said, "until very recently, small has been beautiful for investors." Small cap stocks have left their larger siblings in the dust. Since the market meltdown, the Russell 2000, considered to be a proxy for American small company stocks, has skyrocketed more than 130 percent and has outperformed the S&P 500 over the last three, five, and ten year periods. The downside? Small company stocks come with more volatility than their large cap brethren, on both the upside and the downside.
Recently small cap stocks have shown some vulnerability, leading many investors to say that relatively undervalued large caps will finally dominate.
Royce responded to the aforementioned accusation by stating that, "It has been our contention for some time that higher quality companies, regardless of market capitalization, would lead as the economy moves from recovery to expansion and our conviction has not wavered. Our view on quality-oriented small-cap companies remains very bullish. I suspect that each asset class will lead at different times..."
I could not agree more with Royce's sentiment towards small cap stocks.
In periods of time when stocks have been rising without fail, investors can do very well by investing in index funds through Exchange Traded Funds (ETFs) or mutual funds with exposure to certain asset classes. Investors who have owned small-caps through an ETF like the iShares Russell 2000 (NYSEArca:IWM - News) have reaped significant profits in the past two years.

However, with small caps trading at rich valuations now isn't the time to be buying an index fund. Instead, times like this point to the importance of stock picking and finding the individual small cap stocks that are hidden gems. Now is the time to perform thorough and extensive research. As always, I will be on the constant search for the best small cap stocks that have been overlooked by other investors and analysts. It is my job to present you with small cap companies that have attractive valuations that will grow more quickly than their counterparts. Long-term readers know that I have an impeccable track record picking stocks in the Small Cap Investor Pro email newsletter.
So with a pullback currently underway for small caps, now is the opportune time to carefully analyze individual small cap stocks in search of the best opportunities. You may now find your favorite investments trading at a discount, thus presenting an exceptional buying opportunity. As always though, with small cap stocks it's always best to focus on the quality and valuation of the individual investment. Through this newsletter, I'll continue search and present to you high quality stocks with rapid growth that are trading at attractive prices.
Individual investors can profit by purchasing shares of the best small cap companies at the right time. In spite of the rise of small cap stocks, my team of analysts at Wyatt Investment Research continues to find attractive investments worthy of your consideration.
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