E Small Cap Report: Best And Worst

Seasonality shifts neutral for the coming three months. The Russell 2000 has gained in 6 of the past 10 years, producing an average return of 2.72%, with a standard deviation of 8.37%.

The top small cap industry is property & casualty insurers (STFC, MIG). Rate growth in 2013 offers profit opportunity in 2014. Fewer cat claims helped industry net income grow 60% year-over-year in 2013, aided by the best combined ratio since 2007. It will be hard matching that performance, so watch hurricane season closely. Restaurants (RRGB, DAVE, BJRI) score highly. The 17 restaurants in our all-cap universe are expected to post EPS growth of 13.3% next year. Apparel stores (FINL, PLCE, CACH) benefit from improving weather. Clothing retail sales in February came in 2.6% higher year-over-year. Processed & packaged goods (KTEC, BDBD) round out the best small cap industry list this week.

In small cap basics, only industrial metals & minerals (BOOM) score above average. Trade up in market cap where possible. In consumer goods, focus on processed & packaged goods, home furnishings (STLY, SCSS), and textiles (DXYN, PERY). The best financials baskets include P&C insurers, regional banks (MBWM, CFNL), and savings & loans (NWBI, PROV). In healthcare, buy home healthcare (CHE, ADUS), medical instruments (HTWR, VASC), and medical appliances (OFIX, CYBX, BABY). No industrial goods basket scores above average, focus on large and mid cap instead. In services, concentrate on restaurants, apparel services, and business services (EXAM, CGX). The top technology groups are semi ICs (DIOD, PLXT), scientific & technical instruments (ALOG, FLDM, AFFX), and specialized semiconductor (QLGC, MPWR). Semi book-to-bill historically peaks in the second quarter -- position accordingly.

 

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