The old market adage goes something like “small caps lead the market up and small caps lead the market down.”
If that old saying rings true, the market is headed downward despite the growing strength of the U.S. economy. While the blue chip stocks are currently “riding a bull market now in its fifth year,” according to the Wall Street Journal , the Russell 2000, the most highly followed index for small cap stocks, “is down 3.8 percent for the year and off 7.4 percent from its most recent high in July.”
That’s almost a complete reversal from last year when the Russell 2000 Index was up 37 percent while the S&P was up 30 percent.
The other bearish argument against small caps is that higher interest rates are expected from a Fed increase next year. Higher rates also typically spell tougher times for small caps because it becomes tougher for them to raise money, according to the WSJ report. It is those expected higher rates that have caused investors to pull $15 billion from small cap mutual funds and exchange-traded funds this year, the WSJ reported, citing fund-tracker Lipper.
Some suggest the decline in small caps was due to the fact they have missed out on much of the deal activity this year, one of the main drivers of the year’s stock advance. Furthermore, some investors claim that improvements in the economy have already been priced into the market so if small caps don’t hit the expected 9.1 percent growth in third quarter earnings, they could fall even more.
Of course, there is always another side of the argument. That side suggests small caps have taken their lumps and now, with valuations down, they are ready for a rebound. Add that to the fact that small caps derive most of their revenues from sales in the U.S., rather than internationally like many larger cap stocks, means that if the U.S. market continues to grow at its current pace, the small caps would likely benefit most.
The two small caps the WSJ cited as two of the biggest decliners are both trading near their 52-week lows. Are they ready for a rebound? They include:
Fairway Group Holdings (Nasdaq: FWM), a grocery store chain founded in 1933 and based in New York City. FWM operates 14 locations in New York, New Jersey and Connecticut including three Fairway Wines and Spirits locations. The stores “emphasize an extensive collection of fresh, natural and organic products, prepared foods and hard-to-find specialty and gourmet offerings,” according to company press releases. On Sept. 18 the company announced that veteran retailer Jack Murphy, a co-founder of natural foods grocer Fresh Fields, had taken over as CEO. FWM closed Sept. 29 at $3.78, up 6 cents for the day, with a market cap of $164 million. Its 52-week trading range is $3.68-$26.09.
Rocket Fuel Inc. (Nasdaq: FUEL), a digital advertising firm founded in 2008 and based in Redwood City, CA. The company leverages big data and its computational infrastructure to deliver highly-automated, measurable digital advertising campaigns. The technology company has developed an artificial intelligence and big data-driven predictive modeling and automated decision making platform. During September, FUEL acquired X Plus 2 Solutions Inc. FUEL closed Sept. 29 at $16.43, up $0.97 for the day, with a market cap of $589 million. Its 52-week trading range is $14.29-$71.89.