After what had been solid year-to-date performance through August, small and microcaps caps went into negative performance territory for the year this week.
Through late August the Russell 2000 Index and Russell Microcap Index were up 13% and 16%, respectively, and were outperforming large-caps, with the Russell 1000 up 10% during the same time frame. That worm turned in the intervening weeks, and through Thursday small-caps and micro-caps found themselves down for the year to date by 1.3% and 1.4%, respectively, while large-caps were still in the black, up 2.3%.
Since late August, the divergence is even wider, with the Russell 2000 and Russell Microcap indices down 13% and 13.5%, respectively, while the Russell 1000 is down 6.8%
When we've seen downside market volatility in the past, the smallest names typically have been among the first to be sold by investors. On the whole this year, smaller names until recently had held up quite well relative to their larger cousins during the volatile days, but now we are seeing that script flip. Buckle up, this could become even more pronounced if the recent volatility continues into year-end, as I expect it will.
Break out the Tums and Pepto-Bismol and keep them both next to the dry powder reserved for potential bargains that may be revealed amid this mild chaos. For now, despite the turmoil, my deeper-value screens still are revealing very few investable possibilities. However, I do expect tax-loss selling candidates could be an even more interesting area as 2018 comes to a close.
On a brighter note, gas station REIT Getty Realty Corp. (GTY) announced a dividend hike Thursday, raising its quarterly payout 9.4% to 35 cents, which put the forward dividend yield at 5.1%. The company has been growing the dividend at a solid 11.8% compound annual growth rate over the last five years. The company also continues to grow its asset base; it acquired seven properties during the quarter and added 39 for the year to date. Getty Realty now owns 861 properties and leases an additional 77.
In the land of the distressed, toymaker JAKKS Pacific Inc. (JAKK) did something it had been unable to in the past seven quarters, dating back to September 2016; the company actually reported a profit. Still smarting from the Toys 'R' Us bankruptcy, JAKKS's revenue of $236.7 million missed consensus estimates of $258.6 million. The company earned 38 cents a share, which also was below consensus (61 cents), but it was finally in the black.
The 7.5% boost JAKK shares enjoyed Thursday was most likely due to the reported ongoing interest of Hong Kong Meisheng Cultural Company Ltd. in buying newly issued JAKK shares for $2.95. On Thursday's earnings call JAKKS management went into more detail about this proposal than it has in past quarters, when it typically just mentioned it in passing. Under the proposed deal Meisheng ultimately would own 51% of JAKKS, which would be up from its most recently reported position of 19.4%. However, the proposal has been moving about as slow as molasses since it first was announced last January.
The proposed deal sure is a long way from the $20-a-share bid that Howard Marks' Oaktree Capital Management made in 2011 for JAKKS. Management rejected that bid as too low; shares currently trade in the $2.40 range.
At the time of publication, Heller was long GTY and JAKK.