Small Caps Shine

History shows that small cap stocks outperform large caps over the long term. There are several reasons why this is true, perhaps most notably the growth potential for smaller firms contrasted with the law of large numbers catching up to big companies over time.

What is interesting is the stark contrast between the performance of these two groups in recent years. Since 1999, the S&P 500 has lost about 2% of its value. During the same period, the Russell 2000 index has gained an astonishing 56 percent. In fact, small and mid cap indices have been hitting all-time highs this year, even as the S&P 500 remains 20% off its 2000 high.

After the split of investment banking and research was solidified by New York AG Eliot Spitzer, small and mid cap research has become even less a focal point than it once was. The result has been many public companies flying under the radar screen despite excellent financial results. Now, even more than ever, a focus on undervalued small cap stocks can pay huge dividends for investors. And that’s despite the fact that the market, as judged by major market indices like the Dow and S&P, haven’t done anything in the way of advancement since this decade began.