Small-caps have been a good place to be this year. But some of these stocks have yet to fully take off. Find some of the many diamonds in the rough - and you could take home a neat profit when they make it big.
These under-investigated companies can be big on growth potential. Often, they’re ‘too small’ for the big City boys to take notice. So with research and good timing, there are some solid gains to be made when these stocks finally surface on the City radar.
Today’s chart shows the FTSE Small Cap Index (red line) versus the FTSE100 (green line) for the past six months. Both started the year on a downtrend, but come March (circled), small-caps took off and have gained nearly 40% since. The blue-chips on the other hand made only half of this for the same period.
The blue-chip barometer is looking weak...
For a larger version of this graph please click here
Source: Financial Times
Small-caps tend to perform well during an economic recovery. For example, when the market bottomed in 2003 following the bursting of the technology bubble, these ‘tiddlers’ had a bumper year.
And right now, many small-caps are undervalued on the basis of expected earnings. This is a positive sign for future strong performance. Look for small-caps in the sectors that show good potential for future expansion - technology and healthcare for instance.
There is no clear direction in markets at the moment, with most indices trading in a tight range. But if investors start piling back in, well chosen small-caps will continue to outdo the blue chips. Keep your eyes open. If you select the right companies, this area of the market is a great place to put some of your "risk happy" money.
Editor’s note: Tom Bulford, our resident small-cap expert, writes an exciting twice-weekly free e-letter called Penny Sleuth. For some great small-cap ideas, read his latest issue. Click here: How to profit from increasing City deal flow.
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