Big Opportunity In Small Stocks?

It’s no secret that the market doesn’t look too cheap right now. In fact, by many measures, it’s overpriced. But the difference in the valuation of small stocks and large stocks right now is striking, Validea CEO John P. Reese writes in his latest column for

“Since the end of 2005, my company has been tracking the valuation characteristics of the several thousand stocks in our database, a pretty good approximation of the U.S. market,” Reese explains. “Since then, they have traded at an average trailing 12-month P/E ratio of 19.1. Currently, the average is 21.3, representing an 11.2% premium over the long-term average. The average price/sales ratio over that 10-plus year stretch has been 1.74, meanwhile. Currently, it is 1.95. That’s a 12.0% premium.”

But large-cap stocks are trading at a 21.8% premium to their long-term average using the P/E ratio, and a 24.7% premium using the PSR, Reese adds. “Looked at another way,” he says, “since the end of 2005, large-caps have been more expensive only 3.2% of the time using the P/E and just 0.1% of the time–yes, 0.1%!–using the PSR.” Small- and mid-cap stocks, meanwhile, are on average trading at P/Es 7.4% above their long-term average and PSRs 7.0% above the average. “Expensive?” Reese asks. “A bit. Wildly overvalued? No.”

Reese says that small-caps have been this cheap relative to large caps only 1.6% of the time over the past decade-plus based on P/Es, and just 8.6% of the time based on PSRs. He says his Guru Strategies – each of which is based on the approach of a different investing great – are, not surprisingly, finding a number of attractive small stocks right now. He looks at a handful of them, including Hain Celestial Group.