Small-cap stocks are trading at near generational lows, fund manager says

Meta and its revenue and earnings growth are driving a positive push for stocks on Thursday, with tech giants and Intel to report after the bell.

Big news, big companies, but what about the rest of the world? Our call of the day from Pzena Investment Management is urging investors to check out global small-cap stocks, which they say are both attractively valued and have historically delivered better returns than large-caps. The investment management firm caters to institutions, high net-worth individuals and mutual funds and focuses on deep value investing.

“Today is a particularly attractive entry point for small-cap stocks around the world. Despite rising over 80% since the depths of COVID, the MSCI World Small Cap Index is at a near 20-year low current [price/earnings] of 11.9x,” Pzena told clients in a note. “Additionally, global small-cap stocks are also trading at near generational lows relative to global large-cap stocks.”


To be sure, smaller-cap stocks — and those outside the U.S. offer access to an array of currencies, economies and market cycles — will often experience higher short-term volatility than large-cap names, but also have generated better returns in the past, says Pzena.

Globally, those stocks have beaten large-cap equivalents by more than 100 basis points per year since 1975, and small cap value stocks have beaten the small cap index by more than 300 basis points per year, says Pzena.

They say part of that outperformance is due to a lack of transparency, as smaller companies tend to attract less attention from brokers and research analysts —28% of those stocks are followed by three or fewer analysts, versus 2.4% for large caps. Of course the small cap universe also has three times as many names as the mid/large cap bunch, notes the investment management firm.

Global small caps have another edge over large caps, in that they have less correlation, therefore can offer up bigger portfolio diversification. But for active managers in the space, of which there are far fewer, they’ve got their work cut out for them, given the percentage of loss-making small caps is near a 20-year peak of 43% for U.S. side and 23% for the global side.

“Many people perceive small cap companies to be subscale competitors to larger peers, but in reality, many are leaders in niche businesses. It takes deep fundamental research to differentiate between good businesses and subscale competitors lacking competitive advantage,” they said.

Oh and if a recession is coming, some research points to the better shelter from small caps over large-cap rivals. Schroders took a look at performances by smaller companies globally stretching back to the late 1980s that showed investing in the asset class during recessions drove strong returns. The 40-year period encompasses recessions across the U.S., Europe and Asia:

Investors interested in getting some exposure to small-cap global stocks have a few choices on the exchange-traded fund side, which will take some of the legwork out of finding diamonds in the dust. The iShares MSCI EAFE Small-Cap ETF
Vanguard FTSE All-World ex-U.S. Small Cap
and the Schwab International Small Cap Equity ETF
can all offer some exposure.

Read: Fed ‘accident’ could slice 20% off the S&P 500, stock market strategist David Rosenberg warns. Here are 3 ways to protect your money now.

The markets


are higher, led by the tech-focused Nasdaq Composite
with Treasury yields

up and the dollar
firmer. Gold
and silver
are mixed.

And: Debt-ceiling showdown is a ‘Catch-22’ for markets after House passes bill

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

The buzz

Another packed earnings day is unfolding. Caterpillar
stock is down 3% even after the tractor maker easily beat expectations, while Merck
is up 1% after boosting guidance. Eli Lilly
stock is rising nearly 4% on a revenue beat and guidance boost. Mastercard
said it sees “resilient consumer spending” boosting earnings and revenue, and shares were up.

Mobileye Global
stock is down 22% after the autonomous-driving technology maker cut its forecast, citing issues with China’s market. AbbVie stock
is down 6% after its profit missed expectations.

Highlights after the close include
— expected to post its biggest loss on record — and Snap

Read: Amazon ripped off the Band-Aid. Does that mean big earnings are about to flow?

Among late Wednesday earnings, Meta stock
is surging toward a 2023 record after the Facebook parent’s earnings declined less than forecast and predicted renewed revenue growth.

is up 3% after the online auctioneer swung to a profit. Teradyne
is up 7% after a strong outlook from the electronic testing equipment maker.

The economy grew by 1.1% in the first quarter, below the 2% that was expected, while weekly jobless claims fell by 16,000. Pending home sales are due at 10 a.m.

Best of the web

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Aircraft shortages and fuel costs among reasons why airfares will stay in nosebleed territory.

The chart

The U.S. has a “unicorn” problem, says Wolf Richter of the Wolf Street blog. He’s referring to so-called unicorn companies — startups funded by private investors with valuations of $1 billion or more. His chart shows the “mind-boggling” aggregate valuation for of some 704 unicorns counted in the U.S. by March 2023 — $2.36 trillion. That’s four times as much as in 2019 and as Richter points out, “a ton of money to be finding buyers for,” especially as the era of easy central bank money is over, he said. Read the full post here.

The tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

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