The Most Popular Small Caps Underperformed Last Year. They’re Perking Up in 2020. - Barron's

Popular large-cap stocks have been superstars—companies like Apple, Microsoft, and other tech favorites. But the same can’t be said of small-caps, where popularity appears to be inversely correlated with outperformance.

According to a report published Friday by Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, the most popular stocks held by small-cap mutual funds failed to beat the market in 2019. A basket of the 21 most widely held stocks returned about 20%, trailing the 25.5% return of the Russell 2000 index.

RBC calls the most widely held stocks the “darlings” of small caps. The latest roster (as of the third quarter of 2019) includes TREX (ticker: TREX), Repligen (RGEN), HealthEquity (HQY), Mercury Systems (MRCY), and Teladoc Health (TDOC). The stocks are popular for good reason, Calvasina writes, since they have some of the strongest fundamentals and growth prospects. And some of them have been stars: TREX gained 51% last year, Repligen surged 75%, and Mercury returned 46%.

The overall group of darlings is performing better this year. They’re beating the Russell 2000 by an average of 2.5 percentage points, with 67% of the stocks edging the benchmark. But as a group, the darlings’ performance has been lumpy since 2010 when RBC began analyzing stocks ownership among 380 active U.S. small-cap mutual funds.

Indeed, the darlings have acted more like a bunch of C-students for years. While they have had some good stretches, they’ve delivered market-average returns since 2010, according to RBC.

One bright spot lately has been growth stocks. The most widely held growth stocks outperformed the Russell 2000 Growth index by 10 percentage points in 2019, and they’re beating the market again this year. The list is dominated by tech, industrial, and health-care companies, including TREX, Teladoc, Mercury Systems, Chegg (CHGG), Repligen, and Q2 Holdings (QTWO).

But the performance of popular growth stock “gems” has also been marred by stretches of underperformance; the basket sharply underperformed in 2013, 2014, 2016, and 2017. And their outperformance has been declining since 2018.

Indeed, growth stocks may now be vulnerable to a period of weakness. Their market leadership started to fade in the second half of 2019, RBC says. And while they’re beating the Russell 2000 Growth index by four percentage points so far this year, the market may be shifting from favoring growth to value—a transition that could hurt the performance of both growth funds and small-cap managers overall.

The small-cap darlings tend to stumble when the market shifts from growth to value. The basket of darlings underperformed by 11 percentage points in 2016 and by five points in 2018, periods where growth ceded market leadership to value. “Crowded names tend to lag sharply when the growth trade comes under pressure—a shift that may be starting now,” RBC says.

Rather than buy the most popular stocks, it may pay to own stocks in the second quintile of fund ownership. This group actually outperformed the top 20% of most widely held stocks since 2010, according to RBC.

Stocks in the second quintile (as of the third quarter) include CarGurus (CARG), American Axle and Manufacturing (AXL), Installed Building Products (IBP), Tri Pointe Group (TPH), Archrock (AROC), Great Western Bancorp (VLY), and Ares Management (ARES).

RBC analysts rate these stocks as Outperform, and they’re among their top picks. Whether they’ll live up to expectations and be true market darlings remains to be seen.

Write to Daren Fonda at daren.fonda@barrons.com

Let's block ads! (Why?)

"popular" - Google News
January 21, 2020 at 06:00PM
https://ift.tt/2TGcFM5

The Most Popular Small Caps Underperformed Last Year. They’re Perking Up in 2020. - Barron's
"popular" - Google News
https://ift.tt/33ETcgo
Shoes Man Tutorial
Pos News Update
Meme Update
Korean Entertainment News
Japan News Update

Bagikan Berita Ini