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As S&P 500 pauses, small-cap stocks keep flying

The strong dollar has hurt large-caps, putting a focus on smaller companies

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This year’s most successful small-cap mutual fund managers expect the Russell 2000 Growth Index to extend gains through the end of 2015.

A rally in the dollar has capped gains for large-cap stocks, which have risen only about 1.6% this year, as measured by the S&P 500 Index SPX, +0.51% And the problem is, the benchmark index of the 500 biggest publicly traded U.S. companies already is trading at its highest valuation since 2004.

Small-cap stocks, free from the burden of the strong U.S. currency, are outperforming. The Russell 2000 Growth Index RUO, +0.85% a benchmark for smaller companies, has jumped 8.3% this year. Investors have pushed up those valuations to an average of 35.6 times consensus 2015 earnings estimates, double that of the S&P 500, according to FactSet. The technology-heavy Nasdaq Composite Index COMP, +0.68% is up 5.3% and trades for 21.7 times forward earnings.

Here’s how the three indices have compared over the past three years:

FactSet

The Russell 2000 Growth Index has been strongest, with a total return of 72.7%, closely followed by the Nasdaq Composite, with a return of 72.1%. The S&P 500 has returned 62.8%.
The dollar’s rise

The rising value of the U.S. dollar against other world currencies has hit large-cap stocks especially hard, since big companies are far more likely to rely on sales outside the country than smaller companies do. That is not only because products are less competitively priced abroad. The translation of foreign currencies to dollars also hurts profits.

This is one of the main reasons why 318 of S&P 500 companies have seen their consensus 2015 earnings estimates fall this year.



http://www.marketwatch.com/story/small-cap-stocks-to-keep-fl...

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