Small Cap versus Large Cap

Great charts from Bespoke Investment Group showing how the ratio of outperformance by large cap represented by the S&P 500 over small cap represented by the Russell 2000 got to the top of a 15 year range. However, it shows recently how the ratio has been decreasing as small caps have started to outperform. Even with the small cap rally to large cap recently, the ratio of large cap outperforming small cap is still above the historical average. According to the JP Morgan Guide to the Market, small cap value based on its Current P/E is trading at 93% of its 20 year average Current P/E. Based on this valuation metric, it is the most undervalued area of the U.S. stock market. One thing to keep in mind with the small cap space is the quality of the small cap companies that you own because there are a lot of “zombie” companies in this space. A “zombie” company is one which is not even able to cover their debt-servicing costs with current earnings. According to Leuthold Weeden Capital Management, the proportion of small-cap U.S. firms without earnings stood at 32% at the end of May, matching the highest level since the Global Financial Crisis. So make sure you are well diversified in the small cap space and know what you own . #largecap #smallcap #zombiecompanies #earnings #valuations