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Tuesday December 20, 2011
Small caps: Entering the 'sweet spot'
by Sy Harding, editor Street Smart Report Some investing truisms are pure baloney. But there are some that can be very useful. One that is about to enter its zone is the tendency for small stocks to outperform the market from mid-December to mid-January. It used to be known as the ‘January effect’, but in recent years the pattern has tended to begin in mid-December. The theory behind it is that there’s a considerable amount of tax-loss selling in small stocks toward year end, which drives their prices down, and sets them up for bargain hunters. The tendency is for small stocks to often continue to outperform larger stocks into the spring. One that I like is MTS Systems (MTSC). The company provides systems for testing and examining the mechanical behavior of materials, products and structures, as well as instrumentation for factory automation. The company’s sales and earnings slid significantly in the recession, but have been roaring back this year. Earnings over the last four quarters more than doubled on a 20% sales increase. The company is experiencing solid backlog growth, which bodes well for next year. Meanwhile, solid cash flow has allowed the company to increase its dividend, as well as to accelerate a share repurchase plan. MTSC has roughly $100 million in cash and no long-term debt, and sells at just 12.5 times trailing earnings. I also like Neenah Paper (NP), which was spun off from Kimberley Clark in 2004. The company produces specialty paper products for filtration, abrasives, wall coverings, and melt-blown technologies, as well as for packaging and labels. Earnings are growing at double digits as the company builds on its growing export sales to Asia and South America. The shares are selling at 11 times trailing earnings with a dividend yield of 2.1%. Keep in mind that there’s more risk in small cap stocks because of their smaller float of available shares. One way to substantially decrease individual stock risk is obviously to diversify among numerous small cap stocks, and the easiest way to accomplish that is via etf’s designed to track with a small stock index. So investors interested in the potential for extra dynamism in small cap stocks might want to consider that route. Available small cap ETFs include the iShares S&P Small Cap 600 (IJR); iShares Russell 2000 Small Cap (IWM); and the Vanguard Small Cap Growth (VBK). Learn more about this financial newsletter at Sy Harding's Street Smart Report. 
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