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Opus News & Insights

Review of U.S. Small Caps - April 2018
Friday, May 11, 2018

Key Points
  • For the first time since late 2016, U.S. small caps outperformed U.S. large caps for two months in a row. The Russell 2000 Index (R2K) returned 0.9% in April,besting the S&P 500, which returned 0.4%. Since the market low on February 5th, small has outperformed large by 4.7%. Year-to-date, small continues to lead.
  • Due to strong performance, the R2K's forward P/E rose to 18.5x, up from 17.9x last month. Relative to large caps, small caps trade at a 12% premium, well above their 5% historical average. Furthermore, the Russell 2000 Value Index (R2KV) trades at a forward P/E of 15.6x and the Russell 2000 Growth Index (R2KG) trades at 21.3x.
  • For the first time since September 2017, Value outperformed Growth. This is only the third month that Value has outperformed Growth since 2016. With this, the R2KG continues its dominance for the year, besting Value by 3.4%.
  • Energy had a strong bounce in April, as oil prices reached its highest level since 2014 ahead of the Iran Nuclear Agreement deadline. Rallying 13.4% during the month, this was Energy's largest rally since September; until recently,Energy had been a significant detractor to the benchmark's performance.Bond proxies, i.e., Utilities and REITs, outperformed, which contributed to Value's relative performance against Growth for the month. For the year,Health Care's leadership, specifically biotechs, has given Growth a 3.4% lead over Value.
  • Despite Value outperforming in April, cheap valuations trailed. The market continued to reward the fastest growing EPS companies, but threw a wrench in the spoke of the tire for leverage, as higher debt prevailed, which is surprising during a month when rates continued to rise. Dividend yield kept pace this month, but continues to be a laggard for the year. Overall, stocks that outperformed in April tended to be lower quality, as non-earners were the big winner by far during the month.
  • Earnings season is now under way, with over 33% of the companies in the small cap universe reporting. Sales and earnings growth has been quite strong, though, anecdotally, it feels that the market has not responded to the surprises. Thus far, small caps, on average, have grown sales by 12.5% and earnings by 29% relative to the first quarter last year. Both of these growth figures have outperformed what we have seen for larger cap companies.
  • For the month, only 30.7% of small cap core managers outperformed their relative benchmarks, while Growth managers fared better, with 46.4% outperforming. Value managers struggled, as bond proxies, which value managers tend to be underweight, outperformed over the last two months. Over the last year, half of Value and Growth managers have outperformed their respective benchmark.
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