Quality small-cap stocks can offer investors outsized returns and bring diversification to a portfolio, says a portfolio manager
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Perhaps one of the reasons why investors shy away from small caps is the evolutionary predisposition to perceive “safety in numbers,” represented by investing in large- or mega-cap stocks. It’s among these corporate giants where investors feel protected, nestled among millions of others. They should not be dismissed, particularly at today’s attractive valuations. Here are five reasons to reconsider small-cap stocks.Bear market recoveries are often associated with outperformance in small caps. During periods of economic stress, smaller companies are affected disproportionately. These businesses have lower capital structures and most, if not all, of their revenue is generated domestically, making it harder for them to invest during downturns.
Relative to large caps, small caps have been this inexpensive only 7 per cent of the time in almost 30 years, according to Furthermore, the management teams in smaller companies are closer to their customers. That allows them to act decisively to incorporate changes to their strategic and growth plans. Going back to the Great Depression, small-cap stocks outperformed large-cap stocks during inflationary periods like the one we’re facing today.While large-cap stocks are followed closely by analysts and investors, small-cap stocks are often under the radar.
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