While the S&P 500SPX was down 23.4% from its all-time high last January, the Russell 2000RUT index was down 31.9% from its high, set in November 2021. Overall, the trend makes sense, given that all the components that cause large stocks to fall – High inflation, Fed interest rate hikes and fears of a recession among the victims – have hit the small companies much harder. At the same time, this means that once investors stop worrying and look ahead with optimism, small stocks will be able to perform better.
The Russell 2000 Index fell 27% in 2022, showing its worst half-year performance. The worst performance before that was recorded in 2020, when the Russell fell by 13%. Poor performance was also recorded in 1982, when it dropped by 11%, and in 1984, when it dropped by 9.5%. In all three cases, the second half of the year was much better. The Russell Index rose 38% in the last six months of 2020, 40% in 1982 and 3% in 1984.
This time, Russell’s decline was much sharper than that of the S&P 500, which brought the average profit multiplier to 15.8. Relatively low multiplier, compared to recent years when in November the multiplier was 26. Small stocks have more risk and therefore by definition investors price them at higher multipliers, but currently the S&P at a multiplier of 15.5, is not dramatically lower than the Russell. This reinforces the optimism about the small stocks. The history of the profit multiplier of the S&P index is 5 times higher than the Russell index.
If the economy avoids recession, small stocks will look particularly attractive. Analysts forecast that the aggregate earnings per share in 2023 for the Russell 2000 ETF will grow by 20% compared to 2022. This is a profit that is more than double the expected growth in the S&P 500’s follow-up shares. -27% in two years, and if there is also an adjustment of multipliers up, then the yield will be higher.
Big stocks, small stocks and everything in between
A prudent investor wisely chooses the stocks in which he is going to invest. One of the things that is important to recognize when investing in stocks, is the difference between the big stocks and the small stocks. Here are the main differences between the two types of stocks:
Stability: Large stocks are generally more stable than small stocks. The reason for this is simple – in large stocks, the impact of a sale or buy, even if it is significant amounts, is relatively small and does not affect the stock price. In order for a large stock to fall or rise significantly, it is prudent to buy or sell significant amounts. In small stocks, on the other hand, stock price fluctuations are more significant. A large buy may bounce the stock price and a sale may lower it significantly.
Risk versus chance: From the above it is easy to understand that the risk versus chance in the large stocks is relatively small, and in the small stocks it is much larger. An investor in a small stock may lose a significant portion of his investment in a short time, but on the other hand achieve higher returns because the increases in the small stocks are also more significant.
Opportunities: Large stocks are generally more familiar, while a significant portion of small stocks are traded under the radar and are less familiar to investors. Thus, it is precisely in small stocks that one can find opportunities for quality investment that may yield profits.
You should pay attention to the small stocks. When the trend reverses and gains begin, they will rise at higher rates than those of the major stocks.
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