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Opus News & Insights

Review of U.S. Small Caps - July 2018
Monday, August 6, 2018

Key Points
  • Onward and upward for the market, as stocks rebounded off a weak end to the month of June. For the first time since February, U.S. large caps led U.S.small caps, returning 3.7%, outperforming the latter by 2.0%. As a whole,on average, large saw stronger revenue growth relative to small during Q2 earnings season, driving the outperformance. Small continues to lead for the year by 3.1%.
  • Thus far in 2018, Value has outperformed Growth only during the month of April. This month, Value played the stopper card, avoiding a euchre, as it trumped Growth by 0.1%. Value won, even though Health Care, Producer Durables, and Materials & Processing outperformed, all of which are relative overweights for Growth. Value was propelled by lower valuation being a leading factor during the month, along with the fastest EPS growers underperforming.
  • As the U.S. 10-YR Treasury rose to 3.0% for the first time since mid-May,REITs underperformed, though banks outperformed, driving market-like performance in Financials. Energy continues to cool off, even though it is one of the best performing sectors for the year. One sector not cooling off is Health Care, as it led sector performance during July. For the year, this relative overweight for Growth has a commanding lead over the second-best returning sector, Energy, by 14.1%. Just one of the reasons as to why Growth leads Value for the year by 4.3%.
  • During July, we saw a changing of the guard in terms of factor outperformance,as smaller market cap, non-earners, highly-valued, non-yielders, and the fastest EPS growers underperformed. Ironically, all of these factors continue to lead for the year. This is a headwind for active managers, who tend to be higher-quality; a majority of these factors are classified as low quality.
  • For the month, 50% of small cap Core managers outperformed their relative benchmarks, while Growth managers finally fared worse, with only 20% outperforming. Value managers did slightly better than Growth, as 42% of managers beat their respective benchmark.
  • The forward P/E for the Russell 2000 Index (R2K) slightly increased to 19.4x (from 19.1x) and continues to lie above the 17.9x figure reported in March. The Russell 2000 Value Index (R2KV) trades at a forward P/E of 15.8x and the Russell 2000 Growth Index (R2KG)trades at 22.5x. Only 10% of stocks in the R2K trade below 10.0x forward earnings and 1.0x book value.
  • Earnings season is almost halfway home for large caps, a bit less for small. Large has seen sales grow 9.2%, ahead of small, which has seen growth of 8.6%. Earnings growth continues to be strong for both, as year-over-year effects from tax reform continue to be apparent, with both figures in the 20%+ territory.
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