Who Small-Cap Investors Are Voting For

By tradesmith-research-team

Listen to this post

Small-caps will have their day, and that day could be Nov. 7… Jason Bodner’s Top 10 and Bottom 5… February 2024 in review… What An-E 2.0 sees ahead…

By Michael Salvatore, Editor, TradeSmith Daily

It has been oh so tempting to buy small-cap stocks in 2024. But trying has yielded little more than disappointment. And the temptation wanes by the day.

With 2024 being hailed as the “year of the rate cut” when things kicked off in January, small-caps were the clear bet to make. We’ve shared in these pages how small-caps tend to outperform when the Federal Reserve cuts rates. They also tend to outperform after big routs, like we showed you here.

And aside from that historical evidence, small-caps are where you go to find the companies that will be mid- and large-cap names in the years to come.

How has buying small-caps played out? So far… not awful, but not great either. The small-cap Russell 2000 is up just over 2% in 2024. That’s less than a third of the performance of the large-cap S&P 500.

Over longer time frames, it’s even worse. Since the top in 2021, small-caps have lost 9% of their value, while large-caps have gained 17%. The latter are technically in a bull market (20% off the low set in October), but it’s hardly what you call a pretty chart.

No doubt, high interest rates weigh on small-cap, lesser-capitalized companies more than any other. Investors want to see cheaper credit before they dip their toes in.

So, when will these tortured investors have their day? For my money, their best chance is Nov. 7, 2024 — two days after Election Day.

Let me explain…

❖ Trump’s win in 2016 lit a fire under small-cap stocks…

From Election Day’s close through the end of that week, the Russell 2000 ETF (IWM) surged almost 9%. And get this… It rose 45% higher from Election Day to their peak value during Trump’s presidency… beating out large caps. Can’t make that up.

The data doesn’t lie — a Trump presidency was great for small-cap stocks. It’s easy to see why. A combination of tax cuts and low (or zero) interest rates massively benefits this sector.

Small-caps have done comparatively well during a Biden presidency… with them returning about 26% since his Election Day and a peak of 51% during the bubbly last quarter of 2021. But the Fed’s rate hikes have put a lid on any upward progress since 2022.

That’s why small-cap investors should keep their eyes trained on the day after Election Day. And not just because of the election result.

❖ Two days after America decides, the Fed takes a turn…

It has an FOMC meeting scheduled for Nov. 6 and 7, with the next interest-rate decision announced at 2 p.m. on the second day.

Thus far, the Fed has signaled it won’t cut rates until “the middle of the year,” which we can safely interpret as the June 11 and 12 meeting. Currently, traders have the odds at 54.8% for a 25-basis-point cut at that meeting.

Going out to November, traders expect rates to be either as low as 425 to 450 at the optimistic end, and 475 to 500 from the cynics. The latter case would track with the Fed’s own full-year estimate for 75 basis points in rate cuts for the year, provided it cuts again in December.

Though if Trump does win a second term, and the immediate Fed move after is a rate cut… we shouldn’t consider a small-cap rally guaranteed.

Lower rates are generally good for small-caps, but only if we get them while the economy is not in recession. If we get a rate cut because we “have to” and not because we “get to” — a distinction we’ve been making in these pages — the mood might be very different indeed.

But we’re talking pretty zoomed-out here, about the totality of the small-cap sector. As we’ve shown time and again, it’s a market of stocks… not a stock market. Finding high-quality names in any type of environment is a recipe for wealth regardless of the trend in the benchmarks.

Want a cool way to find high-quality stocks, and avoid low-quality stocks, for free? I know a guy you have to meet.

❖ His name is Jason Bodner…

And every Monday in his Quantum Edge Pro newsletter, Jason shares the top 10 and bottom 5 stocks as ranked by his proprietary Big Money tracking system.

In his years as a Wall Street dealmaker, Jason learned all the telltale signs of a major institution plowing billions of dollars into individual stocks.

Now, he continues to track those signs for his subscribers in his free newsletter Power Trends, as well as TradeSmith Investment Report and Quantum Edge Pro.

Here’s last week’s top 10 and bottom 5.

There are some familiar names in the top 10: Arista Networks (ANET), Nvidia (NVDA), Airbnb (ABNB), and Super Micro Computer (SMCI).

But there are plenty more highly rated stocks that you don’t often show up on CNBC. Scientific- and medical-device manufacturer Bruker (BRKR), digital advertising software company DoubleVerify (DV), and insurance company Brown & Brown (BRO) are all rated strong buys on Jason’s system.

Likewise, there are a few poorly rated stocks to steer clear of. Sticking out here is pandemic-bubble-trader favorite PENN Entertainment (PENN), which is down a cool 85% from its highs. Jason’s system waves the big red flag on this one — that much capital loss does not make it a value play.

And you should know, Jason recommends and provides guidance on the best-of-the-best stocks his system tracks to subscribers. As a Platinum member, you can always access Jason’s latest research for a unique edge on the markets. Click here to log in to your TradeSmith Finance platform.

❖ Here’s another top 10 to keep in mind…

It’s the top 10 best-performing stocks of February 2024, according to our TradeSmith Platinum-exclusive dashboard, TradeSmith Analytics.

One useful tool from this dashboard is checking the performance leaders and laggards on multiple time frames. It gives a fascinating look at how individual stocks wax and wane from the investing zeitgeist… unless they’re quiet enough to slip under the radar.

Here’s the top 10 stock market winners and losers of February. (Note: to cut out the noise, we’re keeping it above a $1 billion market cap.)

Some big winners are crypto company Coinbase (COIN) and bitcoin-proxy MicroStrategy (MSTR) on the heels of big crypto gains. We’re also seeing sustained buying pressure in A.I. stocks like C3.ai (AI), industrial names like Sterling Infrastructure (STRL), and construction companies like Emcor (EME).

Now, for the top 10 declines…

Roku (ROKU) really took it on the chin this month… as did combination sports team, marketing company, and sports apparel seller Manchester United (MANU). Also some trend-averse performance in pharma companies Ironwood Pharmaceuticals (IRWD) and Addex Therapeutics (ADXN) — while the biotech ETF (XBI) closed the month almost 11% higher.

(Interestingly, DoubleVerify appears on both Jason’s Top 10 list and this one. After some research, it looks like the company provided light forward guidance on Wednesday, resulting in a punishing selloff right before February ended. An overdone short-term reaction?)

TradeSmith Analytics, subscribers should know, has a lot more than this. It can immediately show you the most overbought sectors in the market, the highest-quality individual stocks, companies with the highest free cash flow yield, and our “Trinity” list made of uptrending stocks with cheap valuations and high-quality businesses.

❖ Before I run, a programming note for this week…

As you read this, I’m at cruising altitude and halfway to Washington, D.C.

What’s the occasion? A three-day intensive brainstorming session with the best and brightest from TradeSmith and our extended network.

Here we’ll be coming up with and battle-testing brand-new investment ideas for you, our valued subscribers.

I’ll be there myself, along with Jason Bodner, Mike Burnick, Justice Clark Litle, Keith Kaplan, and many other names you’ve seen in and outside these pages.

And I don’t plan to leave you in the lurch. You can expect everything you’ve come to love in TradeSmith Daily all throughout the week, along with something really special…

I aim to get a lot of facetime with our top analytical talent, probing them for their best ideas to help you make money in 2024 and beyond. How I’ll deliver those ideas is still a work in progress… but you can expect these top-grade insights delivered to your inboxes sometime this week.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily