Small Cap Stocks Are Poised for Big Gains (RUT)

The small cap Russell 2000 Index is poised for another strong year in 2017, according to a number of investment professionals quoted in the Wall Street Journal. This follows an impressive 2016, when it rose 19.5% and delivered a total return, including dividends, of 21.3%. By comparison with the latter figure, the S&P 500 Total Return Index (SPX) was up by 12.0% for the year.

The Russell 2000 has continued to surge since Election Day (November 8) through January 6, outperforming the 13.4% rise of the Dow Jones Industrial Average (DJIA), according to FactSet. Over the same period, the S&P 500 Total Return Index (SPX) was up by 6.8%. The Journal offers several explanations for this outperformance.

Trade protectionism and a rising dollar under Trump are less likely to hurt small caps, which tend to be purely domestic firms. Trump’s corporate tax cuts should have a bigger positive impact on small caps, which tend to have higher effective tax rates than large caps. Financial stocks are the largest sector in the Russell, and banking regulations, which Trump has promised to roll back, tend to weigh more heavily on smaller institutions.

"We are in an earnings driven market that we think will conitnue into 2017, " Lisa Kirschner at Richard Bernstein & Associates told the Journal. She thinks the rally in small companies may broaden.

Among all actively managed stock funds, the small cap Aegis Value Fund (AVFAX) easily won the Wall Street Journal’s Winner’s Circle contest with a total return of 70.7% in 2016. The average small cap value fund returned 26.8% in 2016, according to data from the Lipper division of Thomson Reuters Corp. (TRI) cited by the Journal. By comparison, large cap value funds, the best performers in the large cap fund universe, were up by an average of 14.6%.

Regarding small banks, a recent Barron’s article singles out several top performers. Shares of BNC Bancorp (BNCN) of North Carolina are up 32.4% for the twelve months through January 9, Virginia-based Xenith Bankshares Inc. (XBKS) gained 55.9% and Kansas-based Equity Bancshares Inc. (EQBK) advanced 35.8%. However, the latter, an active acquirer of small competitors, is down 13% from its high on December 8.

The top ten performers in 2016 among the Russell 2000 stocks, per an analysis by Investopedia of total returns (dividends plus price appreciation), were: Global Medical REIT, Inc. (GMRE, +4,697.7%), Wins Finance Holdings, Inc. (WINS, +1,400.0%), Cliffs Natural Resources Inc. (CLF, +432.3%), Fairmount Santrol Holdings, Inc. (FMSA, +401.7%), AK Steel Holding Corporation (AKS, +355.8%), Chemours Co. (CC, +316.9%), Clayton Williams Energy, Inc. (CWEI, +303.3%), Advanced Micro Devices, Inc. (AMD, +295.1%), Coeur Mining, Inc. (CDE, +266.5%) and Navistar International Corporation (NAV, +254.9%).