In a recent MarketWatch article, columnist Mark Hulbert suggests that the highest quality small-cap stocks may weather the coronavirus storm better than others.
Using data from Ned Davis Research, Hulbert measured performance over the first six weeks of bear markets (focusing on those since the late 1970s). “While the amount by which the tiniest stocks recently lagged the biggest ones is larger than average, it is not at a record,” he writes, providing the following chart that “makes clear, the smallest-cap cohort’s recent loss relative to the largest stocks is far worse than average, which is just three percentage points”:
Hulbert notes that as poorly as smaller stocks have had it, “their outlook isn’t uniformly grim. There appears to be no correlation between the smallest-cap stocks’ negative alpha in the first six weeks of a bear market and how long it takes for them to eventually surpass their previous bull market highs.”
In conclusion, Hulbert notes that the research suggests “if you want to bet on a quick small-cap recovery, you should do so with small companies of the highest quality—as defined by factors such as high profitability and profit growth, low stock return risk and stability of earnings, and high dividend payout policy.”