Microcaps Continue to Outperform the S&P 500 in 2021

Stop listening to all the noise about short squeezes. Forget the stimulus check that you may or may not get this quarter. It’s time to look at some real numbers. We’re two months into a new year, and investors continue to trend towards microcaps. The data proves it.

The Russell Microcap Index, viewed by institutional investors as the annoying little brother to large cap, mid cap, and FAANG, is up 26% for the year. Comparatively, the S&P 500 has risen just 4.5% this year and the Nasdaq composite is up only 4.44%.

This is not a new phenomenon. The iShares Microcap ETF (IWC) is showing a twelve-month gain of 68.05%. In that same time period, the Dow Jones Select Microcap ETF (FDM) is up 36.31% and AdvisorShare’s Microcap ETF (DWMC) is up 63.81%.

Investors are Embracing the Volatility of Microcaps

I could get philosophical here and talk about the desperation instilled by a pandemic and how that has changed investor behavior. I’m sure there are numbers crunchers somewhere doing that analysis. I’m not one of them. Nor do I believe that’s what’s happening.

Perhaps the most valuable lesson that 2020 taught us is that the status quo will always be challenged at some point. The longest bull market in history came to crashing halt. The world closed and everyone stayed home. An election changed the direction of the energy sector.

By definition, a volatility rating is an indicator for change. High volatility means big changes could be on the horizon. Low volatility means the status quo will be maintained. Does anyone really believe that’s possible anymore? Change is inevitable.

Take that line of reasoning and apply it to your investment strategy. If all things much change, doesn’t it make sense to invest in the companies that have the highest potential upside? Sure, you can hedge with bonds or SIPs, but equity investment needs to be more aggressive.

Trust in the “A List” has Deteriorated

Many investors are turning to microcaps because they simply don’t trust the long-term outlook for “A List” stocks like Tesla (TSLA), Apple (AAPL), and Amazon (AMZN). Those companies aren’t likely to go anywhere, but will they actually make you any money in the next ten years?

Elon Musk took a big gamble with Bitcoin, and I’m all in on that. Unfortunately, Coinbase documentation for their direct listing pointed out some real threats to the crypto leader. Will Satoshi Nakamoto jump out from behind the curtain and ruin everything?

Apple is going to feel the crunch from the semi-conductor shortage. They’re down 4.10% YTD. Tesla is down 6.70% YTD. Amazon is down 4.57% YTD. Those numbers don’t instill confidence in investors. No one’s advocating a wholesale selloff, but I’m not buying any of them right now.

Remember that iShares Microcap ETF (IWC) I mentioned earlier? They’re up 26.38% YTD. There are not a whole lot of “A Listers” in that bucket. Do you still think you should stick with the status quo? Not my story. I prefer to make money, not lose it.

Reddit and Robinhood are the New Normal

Proponents of democratized financial markets shouted with joy when the Reddit raiders short-squeezed GameStop. Robinhood looked like they were in trouble, but they have proven resilient and have overwhelming popular support. This is the new normal.

Personally, I’m surprised it’s taken this long for social media to have a major impact on Wall Street. The most powerful communication platforms of our time were bound to clash with big banks and hedge funds at some point. The plebeians always attack the patricians.

Don’t take that as an insult. I’m a plebeian myself and I’m proud of it. My dad was a civil engineer and WWII combat veteran. His family emigrated from Ireland with nothing. I’m loving the fact that common folks can influence the stock market.

Best Microcaps to Buy this Month

On that note, I’m going to recommend some fairly pedestrian investments this week. The consumer report for January shows a 5.3% uptick in spending, 5.9% if you exclude auto sales. Financial analysts are attributing the jump to December’s stimulus payments.

Buy Abercrombie and Fitch (ANF). They’re already up 35.92% this year and it’s likely (though not guaranteed) that consumers are about to get another stimulus check in the next thirty days. The clothing market is always good when seasons change. Free money will make it better.

My dark horse is Revlon (REV). Their fourth quarter earnings weren’t great and they’re only up 8.09% this year, but I have a hunch that March is going to be a good month for them. Don’t look at this one as a long-term hold. I’m thinking it’s a quick hitter.

My final microcap stock is one that I have been watching for a while. Magnachip Semiconductor Corporation (MX) is based in Luxembourg, and they may the answer to European demand that can’t be met by Asian chip manufacturers. They’re up 56.62% YTD for 2021.

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About the Author

Microcaps Continue to Outperform the S&P 500 in 2021

Kevin Flynn

A former financial professional and founder of AdvisorScale Financial Writing, Kevin lives in Leominster, Massachusetts with his wife Evelyn, two cats, and nine wonderful grandchildren.