Give Me a Real Pullback -- One Where I Can't Resist Buying These 3 Small-Caps

 | Feb 07, 2018 | 1:00 PM EST
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I do realize that I've been obsessed by the market's recent volatility, but perhaps for different reasons than many other investors. To a degree, I view it as positive, wiping away the excesses and reminding us all that bull markets can't continue uninterrupted forever, and that we need to keep our portfolios in balance. We've now experienced five volatile trading days in the S&P 500 (days the market closes up or down at least 1%) in the past eight, and the index is down just over 5% in that stretch. That includes Monday's 4.1% drubbing.

But what interests me even more, is how the nether regions of the market have been doing, the smaller names that typically suffer a great deal more in such times, than their larger counterparts. Perhaps somewhat surprisingly, they are actually hanging in there fairly well so far.

The Russell 2000 Index, comprised of small-caps, is down about 5.9% during the past eight days -- not all that far removed from the S&P 500's performance. The Russell Microcap Index has declined 6.1%, which is even more surprising, to me anyway. For its part, the Index's value component (Russell Microcap Value Index) is off 5.8%.

The fact that there is not a greater separation between the performance of large-caps, and the smallest of the small tells me that at this point, this pullback is not even close to the "throw the baby out with the bathwater" stage. That's when you'd see the smaller names, and the more distressed ones, being the first to go as investors raise cash.

In some cases, due to low volume, the damage can be exacerbated due to a lack of liquidity in the smaller names. Already wide bid/ask spreads can widen further, and investors are often willing to take fire sale prices. That's what happened in 2008/2009, when many names were bid so low, that it created some of the greatest investment opportunities of a lifetime. I have no desire to return there, however.

These last several days, I've been looking for the "too cheap to pass up" opportunities in smaller names, that sometimes result from the selloffs but have been coming up fairly empty. No names that I've been interested have been hammered into submission. My deep-value screens have not been revealing much in the way of new opportunities.

Give me Fogo De Chao (FOGO) at $10, Valhi (VHI) (which I recently sold after a nice and fairly quick run up) at $4, Manchester United (MANU) at $15. Give me some new net/nets or double nets.

Give me another perceived sector meltdown (such as specialty retail in August), where some stocks were overly punished through guilt by association, creating great opportunity for those with strong stomachs (or perhaps in my case, weak intellects).

Give me all of this and more, without a bear market correction.

Some pullback this is.

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