If we get a bull market run in 2012, and many of the more optimistic analysts are suggesting we will, then the small cap stocks will lead the rally, according to a variety of market prognisticators and a bit of history noted in the Wall Street Journal (http://online.wsj.com/article/SB10001424052970204336104577096741015408230.html?KEYWORDS=ben+levisohn). Of course, if the market tanks, the small caps will no doubt be hit hardest because they tend to be more susceptible to volatility and “are particularly sensitive to bad news” and the “macro influence” coming from places like Europe or China, the WSJ article suggests.
But many signs point to a rebound. Jim Paulsen of Wells Capital Management “foresees 15 percent rise for US stocks in 2012, according to a MarketWatch headline Dec. 30. And smallcaps have already been rallying, starting about Oct. 4. Small caps are up 11.5 percent since then, outpacing the large caps by 3.5 points, according to the WSJ. Relatively good news from Europe and improved economic data in that time frame has prompted the small cap rally. If the U.S. economy continues expanding, as such advisors as Goldman Sachs and Macroeconomic Advisors have predicted, the small caps should continue to grow as well.
History is on the side of small caps as well. During a bull market, small caps have outperformed the S&P 500 Stock Index by 47.1 percent since 1929, the WSJ reports, citing Ned Davis Research, which just last month upgraded small caps to overweight.
So how do you choose which small caps to invest in? Look for the highest quality companies, such as the ones that are listed on the S&P Small Cap 600 which requires four consecutive quarters of profitability, as opposed to an index like the Russell 2000 which only screens for size, the WSJ notes.
Here are three other small caps, including one (VHC) picked by Otis T. Bradley of ICM Capital Markets in New York:
Scotts Valley, CA-based VirnetX Holding Corp. (Amex: VHC, http://www.virnetx.com/) is a developer of software and technology for securing real time security solutions over the Internet. In November 2009 it was trading at $1.95 but then went on a tear, running all the way up to $41.77 in early July before market corrections brought it back down to the $20 range where it has stayed since late August. VHC closed Dec. 29 at $25.23, up 13 cents on the day, but Bradley lists this stock as capable of gaining “at least 5- 10-fold over the next 1-2 years.”
Mountain View, CA-based IRIDEX * (Nasdaq: IRIX, http://www.iridex.com/) is a developer and marketer of innovative laser systems and related products for the treatment of eye diseases and another small company on the rise. A 3-year turnaround and a new CEO, Dominik Beck promises a more commercial orientation. IRIDEX was trading at $3.66 on Nov. 16 and closed at $3.58 on Dec. 29. The 52-week range is $3.08-$4.75. Market cap is $32 million.
Northville, MI-based Amerigon * (Nasdaq: ARGN, http://www.amerigon.com/) is the world’s leading marketer of thermoelectric technologies for automobiles and is best known for its actively heated and cooled seat systems featured in more than 50 vehicles. But it is winning new headlines for a thermoelectric generator (TEG) that the company is developing with partners including BMW, Ford and Caltech’s Jet Propulsion Lab. The TEG converts waste exhaust heat into electricity, a technology that has been shown to reduce toxic emissions and increase fuel economy along with providing a much needed new source for electricity in a vehicle. The January edition of Car and Driver lists the TEG as one of the top 10 most promising innovations of 2012 and experts are predicting a rebound in auto sales in 2012. The stock closed Oct. 10 at $14.02, down from its $18.18 high for the past year, but above the $9.33 low. On Dec. 29 it closed at $14.22, up 25 cents for the day.
* Denotes client of Allen & Caron, Inc., publisher of this blog