Small Caps Leading the Surge

Today we came across some interesting research by Bespoke Investment Group that showed the recent performance of stocks across the ten size-based deciles that make up the S&P 500. The index is up about 20 percent off its Nov. 20 lows, but according to Bespoke, “the average stock in the S&P 500 is up even more at 27.32%. This is because the smallest stocks in the index have outperformed their larger cap brethren … The two deciles of the largest cap stocks in the S&P 500 are up roughly 17% since the 11/20 close, while the decile of the smallest stocks is up an average of 54%.”

This got us thinking, of the portfolios we run on, which ones tend to be more small cap focused and what has their respective performance been since November 20th The Small Cap Growth (based on The Motley Fool), Value Investor (based on Ben Graham) and Book/Market Investor (based on Joseph Piotroski) portfolios tend to play the most in the small cap arena. In looking at the three portfolios, we found that since the November 20th low the Book/Market strategy was up the most; over the last 12 days, the portfolio has jumped an impressive 49.95%, which is above all but the last decile in Bespoke’s research.

The Book/Market portfolio is created using the investment strategy outlined by Joseph Piotroski, an accounting professor at Stanford University. While at the University of Chicago, Piotroski published a research paper on stock selection and looked to find out exactly what factors affect stock performance over the long-term. He started out by narrowing his universe to companies trading in the bottom 20% of the market based on their Price/Book ratios (which is the same as the top 20 percent of the market in terms of Book/Market ratio). He found that many low Price/Book stocks did not produce excess returns over the long term, however, because many low Price/Book companies are trading at a discount because they are poor companies and investors know it. When he applied a series of additional tests of financial strength to these stocks, however, he was able to separate the strong low Price/Book stocks from their weak counterparts, and identify a set of criteria that did lead to market outperformance.

The stocks below are five (out of the ten) in Validea’s Book/Market portfolio:

  • RCL–ROYAL CARIBBEAN CRUISES LTD. ($2,219M market cap)