Man, have small-caps been a big disappointment so far this year. And it wasn’t supposed to be this way. At the end of 2023, small caps outperformed the market and Big Tech rather sharply. Still, I recommend taking a look at the Pacer US Small Cap Cash Cows 100 ETF (CALF), suggests Sean Brodrick, editor at Weiss Ratings Daily.
Wall Street assumed 2024 was supposed to be small caps’ big year. But that’s not how it has worked out.
Small caps were recently down for the year, while tech was up 2.3% and the S&P 500 was up 6%. Some parts of the small-cap universe are doing even worse. Small-cap tech recently hit new five-month lows, down more than 13% from its December highs.
So, we should avoid small caps going forward, right? Nope! What if I told you there are small-cap stocks that are eating the S&P 500’s lunch? And you can buy them right now?
What’s hammering small caps broadly is that the Fed has kept its benchmark interest rate higher for longer than Wall Street thought possible. Small-cap stocks generally need to borrow money at some point — small-cap tech even more so — which means they are borrowing at higher and higher interest rates. That just hammers earnings potential.
On the other hand, what about small-cap stocks with plenty of cash flow? They don’t need to borrow at higher rates. Those are the ones that can really outperform — not only their index and the S&P 500 but the expectations that brain-dead Wall Street is working from.
I can think of two small-cap investments that can do very well indeed. One is CALF. It has a Weiss Rating of “C+,” and it focuses on stocks with plenty of free cash flow — in other words, “cash cows.” CALF recently sported a dividend yield of 1.06% and an expense ratio of 0.59%.
Companies with high free cash flow can survive high rates. Heck, they can thrive in this environment, because they are not burdened by the financial restraints other small caps have.
If you want, stick with the S&P 500. But I’ll bet on the little guys. They could deliver a big surprise this year.
Recommended Action: Buy CALF.
