2 Small Caps That Will Outperform Over The Next 10 Years

Small caps are looking more attractive now, and these 2 small caps look like good buys now.

Retire in 18 months with $2.4 million?

37 year old trader uses this “unconventional” strategy to turn $10K into $2.4 million in only 18 months. Another trader turned $5K into $15 million and still another turned $30K into $80 million. Click here to discover their millionaire maker strategy. [ad]

Read More


Small caps may be lagging their large cap peers so far this year, but there are some experts who say now’s the time to buy.

So far this year, the Russell 2000—which tracks small caps—is up just 9.5%, while the S&P 500 is up just over 17% year-to-date.

But this gap has taken small caps to their most attractive valuation levels in years compared to large caps, giving investors a great opportunity to buy. It also helps that small caps tend to outperform when inflation picks up and they also aren’t typically as impacted by global trade conditions as they tend to operate domestically.

“Valuations have limited short term predictive power, but matter more over the long term,” wrote Jill Carey Hall, senior U.S. equity strategist at Bank of America Merrill Lynch, in a note. “The relative P/E today suggests that small caps should lead large caps over the next decade.”

Leuthold Group chief investment strategist Jim Paulsen pointed out in a note this week that volatility has spiked recently for small cap stocks compared to large caps, and that, he says, historically has signaled a period of outperformance for the group. Small caps also historically outperform by an average of 6% when the valuation gap between small caps and large caps is as wide as it is now.

Small caps also tend to perform well when the Fed lowers rates. Jefferies data showed that, on average, small caps have a 12-month return of 27.9% after the Fed begins an easing cycle, while large caps return 15% in the same time frame. The Fed has already cut rates twice this year, and is widely expected to reduce rates again at its October meeting.

“Lower rates are boosting housing and that’s a very large portion of small cap earnings and more so than large caps,” said Jefferies equity strategist Steven DeSanctis, who also noted that more than 30% of small cap earnings come from housing.

For many investors, though, small caps are a riskier bet as they tend to be more volatile and unpredictable than large caps. 

“Risk-wise, you have to be a bit more careful,” Papamarkou Wellner Asset Management president Thorne Perkin said. “In small caps, you have to really understand company operations and their competitive environments.”

But Hodges Capital’s Eric Marshall says small caps are worth the risk. “Small caps do tend to carry more risk, but they should over time reward investors for taking that risk, meaning they normally outperform over long periods of time.”

Two small caps Marshall likes now are Brooks Automation (NASDAQ: BRKS) and Diodes Inc (NASDAQ: DIOD), both semiconductor makers.

Of the two, Wall Street is most bullish on Diodes. Analysts’ average price target for the stock indicates 37% upside over the next twelve months. 

Wells Fargo analyst Gary Mobley recently initiated coverage of Diodes with an Outperform rating and a $55 price target – 37.5% higher than the current price. Mobley said in a note that consolidation in the semiconductor industry has helped Diodes to break into the key automotive market, a market that offers growth and margin potential for the chipmaker.

There are risks inherent in all investments, which may make such investments unsuitable for certain persons. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities. You may lose all of your money trading and investing. Do NOT enter any trade without fully understanding the worst-case scenarios of that trade. And do NOT trade with money you cannot afford to lose. Past performance of an investment is not necessarily indicative of its future results. No assurance can be given that any implied recommendation will be profitable or will not be subject to losses. Information provided by the Company is not investment advice. The Company is not a registered investment adviser, stock broker, or brokerage. You agree that the Company does not represent, warrant, or take responsibility that any account will or is likely to achieve profit or losses similar to those shown. Examples published by the Company are selected for illustrative purposes only. They are not typical and do not represent the typical results of all stocks within the Company’s software or its individual scans and searches. No independent party has audited any hypothetical performance contained at this Web site, nor has any independent party undertaken to confirm that they reflect the trading method under the assumptions or conditions specified.