Although small cap stocks have taken a bit of a beating over the past few months, they remain one of the better performers in 2010. In addition to their strong performance, small cap securities are expected to be one of the strongest performing categories in 2010 for the reason we will discuss here. Although there are certainly some risks associated with investing in small cap securities, they make great sense for investors seeking long-term gains. So, without giving too much away, let's take a look at the first reason why we believe you need to own small cap stocks this year:
1. Small Cap stocks have been steady performers over time. When measured against other sectors including Energy (although not natural resources), Financials and Real Estate, the Small Cap category of stocks has outperformed on a 3-year and 5-year basis. This may seem odd, but their performance can be easily explained given that small cap securities had a lot less to "lose" than their larger cap counterparts. In addition, strong performance this year and last (although large caps to a large degree performed just as well if not better in some areas) have helped to wipe out a lot of the fears that arose as a result of the financial crisis.
2. Innovation. In terms of opportunity for tremendous growth, small securities have everything to offer compared to larger cap, blue chip stocks. This makes a lot of common sense since larger capitalization companies have had to pull back on their research and development expenditures and focus almost entirely on basic survival; small capitalization companies in comparison have had to be leaders in innovation to achieve the same result -- survival. Notwithstanding this, smaller companies are always at the leading edge of innovation, either pushing and pushing until their product "sticks" or until they are bid up and bought out by larger companies who have had to sit on the sidelines.
3. Many small capitalization stocks have yet to enjoy the growth in price that a lot of larger stocks have. The easiest example here is Citigroup, which has not done anything "spectacular" compared to some other smaller capitalization financial institutions that have not only seen good profits this year, but have been highly profitable while the rest of the larger financial companies begged for government bail out funds. And this is just the financial services arena -- imagine some of the small and micro energy firms that have been virtually ignored.
These are just three reasons why people need to invest in small cap stocks in 2010. Looking around elsewhere on the internet will reveal even more compelling reasons to invest in this high opportunity sector.
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