Small-cap stocks set for boost, says CIO

Nov 15, 2017
Investors should focus on revenue growth among small caps

Small-cap stocks enjoyed enormous success last year until they peaked in December 2016, with the Russell 2000 small-cap index moving mainly sideways through to August this year. Since then it has added more than 100 points.

And according to analysis from one small-cap expert, investors should plug into the potential they offer. 

In a recent report to clients, Francis Gannon, co-chief investment officer of The Royce Funds, argues that in the current environment, globally exposed small-cap cyclicals represent an attractive opportunity so investors should focus on revenue growth at small-cap companies.

Although only a small percentage of revenue is generated outside the US (roughly around 19.8 percent), Gannon says: ‘It’s significant in certain industries and sub-industries within the Russell 2000 index. These are great areas to find global businesses, and people tend to forget that many small-cap businesses are global businesses that generate revenue outside the US and think globally in terms of how they operate.

‘There’s a leg there from an earnings perspective that investors are missing. We expect earnings from these businesses to do better because we see the pickup in economic activity outside the US coupled with a decline in the dollar as a double opportunity to boost earnings growth.’

Some analysts suggest the sectors that have many little-known, undervalued and fast-growing small caps are technology, media and healthcare.

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