WSJ - small cap value stocks due for some outperformance -
Few corners of the U.S. stock market embodied the “Trump bump” more than undervalued shares of small U.S. companies.
After being left for dead for much of this year, so-called small value stocks are perking up, and analysts are growing bullish. Shares are up more than 7% over the past month and some say a second wind can carry the group to above-market gains in the final months of 2017.
That is because big-cap U.S. stocks are looking pricey and signs that the Federal Reserve still plans to move steadily to boost interest rates mean this overlooked group could be poised to receive investors' attention.
Small value stocks shot higher in the immediate wake of the U.S. presidential election. Investors hoped that tax reform, infrastructure spending and pared backed regulation would boost the U.S. economy.
That postelection euphoria rewarded shares of long neglected financial and industrial firms. Shares of small companies, which do business domestically and so tend to pay higher marginal tax rates, jumped as well.
The iShares S&P Small-Cap 600 Value ETF, which is nearly 40% composed of industrial and financial stocks with below-market valuations, soared 16% between Election Day and the end of 2016.
But small value quickly ran out steam as optimism for quick passage of Trump’s agenda faded. Shares of economically sensitive stocks languished, and the Russell 2000 Value Index was the only major benchmark to end last week with a year-to-date decline.
That makes small value a screaming buy to some, including Vincent Deluard, head of global macro strategy at broker-dealer INTL FCStone.
Fed officials this week affirmed their view that the U.S. economy is strong enough to support higher interest rates, a plus for small, cheap U.S. stocks that benefit from sustained growth.
Of equal importance, Mr. Deluard sees this group rising in part as investors sell to take profit in big-cap tech stocks that have dominated the market all year and rotate to cheaper segments of the market.
That already seems to be happening. The iShares Small value ETF is up 7.4% over the past month, more than doubling up the S&P 500 return and topping plain, old small-cap benchmarks.
Watch for signs of this rotation to confirm the breakout in small value stocks.
