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Expecting Valuations To Hurt Small Cap Stocks

Posted by: : Paul EbelingPosted on: February 8, 2015 Expecting Valuations To Hurt Small Cap Stocks

Expecting Valuations To Hurt Small Cap Stocks

With almost  all of their revenue coming from the United States, the companies in the Russell 2000 should be the most obvious beneficiaries of a growing US economy.

But,  fund managers and analysts are cautioning that small-cap stocks already trade at valuations high above long-term averages. This will likely put a cap on future gains.

Companies in the Russell 2000 look expensive compared with their history.

 The trailing PE/R (price to earnings ratio) of the index is at 22.7X, which is 40% more than its long-term average of 16.2X. Its PS/R (price-to-sales ratio) of 1.6X is nearly 67% higher than its long-term average.

The Russell 2000 is up 11.9% over the last 12 months, compared with a 16.7% gainer in the large-cap Standard & Poor’s 500 Index  over that frame. YTD, both indexes are up less than 1%.

Overall, in the last 5 yrs, 81.3% of revenue for Russell 2000 companies came from the United States, compared with 64.3% of revenue for S&P 500 companies, according to the data.

NFPs (Nonfarm payrolls) increased 257,000 last month, the US Labor Department said Friday, above forecasts. The US Dollar (.DXY)  Index rose just above 1% on the news.

Shayne and I are more concerned about the USD continuing to rise more than the share prices for small-cap stocks. A rapid rise in the Buck indicates that participants are seeking safety, and will draw them away from small-cap stocks

A rising USD is a signal that the global economy is slowing.

Have a terrific week.


Paul Ebeling

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Paul Ebeling

Pattern Recognition Analyst, equities, commodities, forex
Paul Ebeling is best known for his work as writer and publisher of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly-regarded, weekly financial market letter, where he enjoys an international audience among opinion makers, business leaders, and respected organizations. Something of a pioneer in online stock market and commodities discussion and analysis, Ebeling has been online since 1994. He has studied and worked in the global financial and stock markets since 1984.

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