The Small-Cap Stock Opportunity: Investing Like It’s 2000
Many of us remember the legendary musician Prince urging us to “Party like it’s 1999,” but as a small-cap stock investor today, I suggest a different year to focus on: 2000.
By March 2000, the NASDAQ had hit its peak at 5048, only to plummet by almost 35% by April. What followed was an 18-month period of turmoil, with former tech high-flyers like Pets.com and Priceline seeing their values evaporate. Even tech stalwarts like Intel, Cisco, and Oracle experienced major setbacks, leading to trillions of dollars vanishing in what became known as the dot-com bubble burst.
However, for some investors, the aftermath of the dot-com bubble presented a golden opportunity. It was a chance to acquire positions in quality companies that the market had given up on. I believe that small-cap stocks find themselves in a similar position today.
Currently, small caps are being ignored, unwelcome, and left out of the recent market party dominated by a few mega-cap tech stocks. This scenario draws parallels to the AI mania of the dot-com era. Selective stock picking in the Canadian small-cap tech sector presents opportunities echoing the past.
What’s Happening Now — Why the Big Discount?
In both life and investing, things happen for a reason, and the current undervaluation of small-cap stocks is no exception.
1. Big pools of capital are increasingly going private.
Large institutional investors like pension funds are seeking alpha, shifting investments from small-cap public companies to private markets. This migration affects small-cap valuations as fewer investors are interested in this segment.
2. Investors are chasing performance.
The dominance of a few mega-cap tech stocks like Apple and Microsoft has led investors to seek large-cap returns, neglecting small caps which are currently undervalued.
3. There’s the macro and the micro.
Small caps have faced headwinds due to rising interest rates and debt dynamics, resulting in lower valuations compared to their large-cap counterparts.
What Are the Upside Catalysts?
Amidst these challenges lie opportunities for small-cap stocks. When monetary policy becomes more favorable, small-cap equities are expected to respond positively. Institutional funds will redirect capital towards quality small caps, potentially driving a re-rating and surge in share prices.
Looking ahead, the M&A market could also offer potential upside for small caps, as companies seek growth opportunities through acquisitions.
The historical small-cap premium suggests that small-cap stocks may outperform large caps over time, making them an attractive investment opportunity.
If history repeats itself, small-cap stocks could be set for a resurgence, offering compelling returns for investors. Subscribe to stay updated on the latest investment insights.
Disclaimer: The views expressed in this article are solely those of the author and do not constitute investment advice. Readers should conduct their own research or seek professional guidance before making investment decisions.
Image credit: ©Getty Images / jjwithers
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