Small-cap stocks have outperformed large-cap stocks over time, especially over longer time frames. For example, small caps outperform large caps over half the time during rolling three-year periods— a figure that jumps significantly for rolling 20-year time frames.

Further, small-cap stock prices are disproportionately affected by external factors, making independent fundamental research crucial to identifying the most mispriced securities. Thus, a long-term outlook informed by primary research is critical.

The role of primary research has become even more vital since cutbacks in published research coverage have fueled greater information inefficiencies. The average stock in the Russell 2000 is now covered by roughly six analysts, versus nearly 20 for large caps.1

As long as non-fundamental factors partially drive them, small-cap stock prices will swing at times to irrational extremes. By remaining grounded in the fundamentals, a skilled active manager with a long-term outlook can both recognize and capitalize on these disconnects as they arise.

Diversified cap companies are usually considered safe to invest in. At times the economic specialists or the market analysts proclaim that for a particular quarter, certain companies are expected to outperform the large caps. As economies start recovering, certain small caps are able to post stronger levels of earnings growth compared to larger firms. The reason being, these small caps benefit greater even from a slight increase in the spending power of common masses. This fact might lure more investors to take up the risks of small caps instead of sticking to the more tried and tested blue chip stocks.

To be successful, active small-cap managers must rely on a constant flow of dialogue with management, deep understanding of business fundamentals, and an awareness of industry cyclicality.

With a long history of small-cap investing, Paradigm Capital Management a trusted leader in small cap investing employs a disciplined, bottom-up approach with an emphasis on fundamental analysis and extensive management contact.

To learn more about how Paradigm Capital Management’s capabilities align with your long-term goals, please contact us at (518) 431-3500