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At first glance, small cap stocks seem like a bargain. But dig deeper and the story gets complicated.
A common way to tell if a stock looks expensive is to divide its price by the company’s profits. According to one measure, the benchmark Russell 2000, whose members have an average market cap of around $ 3.3 billion, recently traded at around 19 times its earnings from the previous year, while the The Russell 1000 large-cap index has traded at 25 times, which segment seems like a bargain.
However, when calculating the price / earnings ratio, analysts, as in the figures just quoted, sometimes exclude companies that are not making a profit. This can have a dramatic effect on the price of a large part of the market, especially as the share of the small-cap index with no profits, which was initially high, jumped in the aftermath of the pandemic-induced recession.
For the Russell 2000 benchmark, leaving out unprofitable companies means setting aside what, over the past year, has been over a third of the market value of the Small Cap Index, based on Jefferies’ earnings analysis of the past 12 years. month.
By comparison, only about 8% of the Large-Cap Russell 1000 Index, whose members have an average market cap of around $ 511 billion, was made up of companies that were unprofitable at last count.
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