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  1. Home
  2. / Investing
  3. / Technology

Spinning My Small-Cap Value Wheels Out of the Gate

My tracking portfolio is flat for the year to date, though there have been wildly divergent performances by the constituent stocks.
By JONATHAN HELLER
Feb 08, 2017 | 11:00 AM EST
Stocks quotes in this article: KLIC, AXTI, UVV, TESO, ESIO, FIT, WMAR, MOV, HURC, CSS, GENC, RAIL

While it's early in the New Year, we are experiencing a mini-rotation of sorts, as smaller names are underperforming larger names. Year to date, the S&P 500 is up about 2.4%, but as you look further down the market-cap spectrum, the story changes. The Russell 2000 is close to flat (up 0.4%) while the Russell Microcap Index is down 1.7%.

There's also divide between the performance of growth and value. The Russell 2000 Growth Index is up 1.7% year to date, while the Russell 2000 Value Index is down 0.8%. There's also a percentage-point performance difference between the Russell Microcap Growth (down 1.1%) and Russell Microcap Value (down 2.1%) indexes. The diverging performances between growth and value are most pronounced in large-caps, as the Russell 1000 Growth Index (up 4.4%) is strongly outperforming the Russell 1000 Value Index (up 1.1%).

At least for now, large growth is back in style. That's not exactly music to the ears of those focused on small value, but this comes with the territory. Value enjoyed a solid run last year, and all good things must come to an end, at least for now. I suspect that with all the uncertainties surrounding the new administration's policies, the economy, potential tax reform, rising interest rates, inflation and trade policy that we are experiencing a flight to quality of sorts in the equity markets, most pronounced toward larger-growth names.

With smaller value names taking some heat, the performance of my 2017 Double Net tracking portfolio has been interesting so far, to say the least. First, the portfolio is about flat for year (off 0.2%), which is OK all things considered. Digging deeper, however, reveals widely diverging performances by the portfolio's constituents.

The best performer so far is Kulicke & Soffa (KLIC) (up 28.5%), which put up some solid first-quarter numbers last week; the stock is enjoying a solid run over the past year. AXT (AXTI) (up 16%), Universal Corp. (UVV) (up 11.6%), Tesco (TESO) (up 8.5%) and Electro Scientific (ESIO) (up 6.7%) also are aiding the portfolio's performance.

From there, however, it is all downhill. Twelve of the portfolio's 20 names are in negative territory, with struggling Fitbit (FIT) (down 21.9%) leading the way. That name is sucking wind, as investors try to decide whether there's value at these levels or another shoe to drop. Boating retailer West Marine (WMAR) (down 13.5%) has given back its late 2016 gains on no news and now trades at 1.03x net current asset value. The company is expected to report fourth-quarter earnings on Feb. 27, but that's low season for the company and losses are expected.

Watchmaker Movado (MOV) (down 11.3%), Hurco (HURC) (down 9.7%), CSS Industries (CSS) (down 8.9%), Gencor (GENC) (down 7.2%) and FreightCar America (RAIL) (down 5.1%) round out the biggest losers so far this year.

This is the type of environment where smaller, more distressed names can swing wildly on a daily basis. Hopefully, in all of volatility, it also will provide some opportunity to pick up some names on the cheap.

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At the time of publication, Heller was long KLIC, FIT and RAIL.

TAGS: Investing | U.S. Equity | Technology | Industrials | Markets | Consumer | How-to | Gaming | Stocks

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