3 Small Cap Picks. Plus, Balancing the Magnificent 7
Dec 1, 2023
auto_awesome
Alger fund manager Amy Zhang discusses the bear market in small cap growth stocks and the potential for a turnaround. The hosts explore strategies for diversifying away from big tech stocks. Dimensional Fund Advisors and Research Affiliates offer different approaches to factor investing. The speakers debunk the perception of small cap stocks being risky. The hosts discuss PRO, a software as a service company specializing in price optimization.
30:08
AI Summary
AI Chapters
Episode notes
auto_awesome
Podcast summary created with Snipd AI
Quick takeaways
Small cap growth stocks are currently trading at a significant discount to the S&P 500, presenting an attractive investment opportunity.
Utilizing alternative strategies like custom indexing services and factor-based investing can provide growth while diversifying away from big tech stocks.
Deep dives
Investing Beyond Big Tech
Many investors have been seeking ways to diversify away from the heavy weighting of big tech stocks in the S&P 500. The challenge is finding alternatives that can provide growth without relying on those dominant tech companies. While small cap and value stocks have been suggested, they have not consistently delivered the expected returns. However, small cap growth stocks are currently trading at a significant discount to the S&P 500, presenting an attractive investment opportunity. With the cycle of rate hikes coming to an end, small cap growth is expected to benefit from a potential tailwind. Investing in exceptional small companies that have the potential to become exceptional large companies is key. These companies often have strong competitive advantages, unique growth potential, and the ability to gain market share in an expanding market. Examples of such companies include Pro's Holdings, a software company specializing in price optimization, and Wingstop, a technology-driven chicken wing franchise.
Finding Growth Outside Big Tech
For investors searching for growth outside big tech, there are alternative strategies to consider. One option is the NASDAQ 100 equal-weight ETF, which provides tech exposure without the dominance of the big tech companies. Another approach is utilizing custom indexing services offered by financial advisors, allowing investors to mimic the performance of the S&P 500 excluding the dominant tech stocks. Additionally, fundamental index ETFs and factor-based investing can provide a blend of selectivity and diversification. Companies like Invesco and Dimensional Fund Advisors offer funds that utilize different measures of firm size and economic value to construct portfolios. These strategies aim to provide alternative paths for growth while diversifying away from the market concentration of big tech stocks.
Small Cap Stocks and Promising Opportunities
Small cap stocks, particularly small cap growth stocks, present attractive investment opportunities. Valuations for small cap growth stocks are currently at a significant discount compared to large cap stocks. The end of the rate hiking cycle is expected to provide a favorable environment for small caps. Investing in small cap growth companies with strong and wide competitive advantages can lead to sustained revenue and profitability growth. Companies in sectors like healthcare and technology, with innovative products and potential for market disruption, often offer compelling investment prospects. Some examples of small cap growth stocks include Pro's Holdings, a software company specializing in price optimization, and Wingstop, a technology-driven chicken wing franchise with a focus on digital transformation and international expansion. Aflo, a cloud-based property management software company, is another small cap growth stock with a market poised for significant growth in digitization.
