Are Small Cap Value Stocks A Buy?

Heartland Advisors

Michael Burry, who rose to fame by betting against mortgage backed securities before the financial crisis of 2008, made headlines recently with comments that the mania for passive index products is creating a bubble.

He also thinks that small cap value stocks may be the big winner when it eventually pops.

Small Cap Value Stocks: The Small Long

With all due respect to Burry, it is a case we have been making for some time. A look at the chart below highlights the performance gap between small and large cap stocks.

Not surprisingly, the difference also shows up in stock market valuations.

The S&P 500 is trading at nearly a 50% premium to earnings vs. our custom-tailored small cap accounts. Note the Russell 2000 below – small cap value stocks…

russell 2000 index versus s&p 500 performance valuations chart small cap value stocks 10 year

Who knows, if Burry’s latest call plays out as well as his last one, maybe they’ll make a sequel to the movie The Big Short, which made him a household name. They can call it The Small Long. 

In the meantime, we’ll be here crafting portfolios for those looking to capitalize on the opportunity in small caps.

This article was written by Bill Nasgovitz, Chairman and Portfolio Manager at Heartland Advisors.

Disclosure:  Past performance does not guarantee future results.

Investing involves risk, including the potential loss of principal. There is no guarantee that a particular investment strategy will be successful. Value investments are subject to the risk that their intrinsic value may not be recognized by the broad market.

The statements and opinions expressed in the articles or appearances are those of the presenter. Any discussion of investments and investment strategies represents the presenters’ views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true. Economic predictions are based on estimates and are subject to change.

Small-cap and large-cap investment strategies each have their own unique risks and potential for rewards and may not be suitable for all investors. Small-cap investment strategies emphasize the significant growth potential of small companies, however, small-cap securities, are generally more volatile and less liquid than those of larger companies. Large-cap investment strategies emphasize the stability of large companies, however, large-cap securities are more susceptible to momentum investments and may quickly become overpriced or suffer losses.

Definitions: 

Passive Management is a style of management associated with mutual and exchange-traded funds (ETF) where a fund’s portfolio mirrors a market index. 

Russell 2000 Value Index measures the performance of those Russell 2000® companies with lower price/book ratios and lower forecasted growth characteristics. 

S&P 500 Index is an index of 500 U.S. stocks chosen for market size, liquidity and industry group representation and is a widely used U.S. equity benchmark. All indices are unmanaged. It is not possible to invest directly in an index.

Any opinions expressed herein are solely those of the authors, and do not in any way represent the views or opinions of any other person or entity.

NOT INVESTMENT ADVICE – PLEASE READ INVESTMENT DISCLAIMER.