In the Strongest Sectors, Select Small Caps Shine Even Brighter
For many years, we were stuck in a binary “Risk On” and Risk Off’ environment -- where almost all stocks go up and down together in unison. But after another rise in interest rates last week, and the outlook for more rate increases next year by the Fed, the environment is continuing to change. That’s because higher interest rates mean different things for different assets, and therefore impact industries, sectors, and stocks in different ways.
Right now, as we mentioned earlier, the same materials, industrials, and financial shares that were laggards for the first half of the year are now showing improvements in their buy/sell ratios. With interest rates and other positive catalysts for those sectors piling up, their returns so far this year have been 18.9%, 20.4%, and 25.3%, respectively.
That’s not bad, of course. But keep in mind, most quoted sector returns include only large cap stocks that are a part of the S&P 500. There’s room for outperformance if you look into the small cap universe at stocks with the highest Weiss Ratings.
Had you done so, you could have spotted a stock like Farmers National Banc Corp. (FMNB, Rated “A”). The Ohio bank has a market cap of just $384 million, and it’s up almost 86% so far this year. Or there’s a stock like Esco Technologies (ESCO, “A”), an industrial parts supplier to the aerospace, utility and healthcare sectors. It’s up more than 60% since the election alone. And to cover all of our hot sectors, how about Neenah Paper, Inc. (NP, “A”)? The Georgia-based packaging products provider is up 45%.
In sum, the buy/sell ratios help us see which sectors are on the move, and where we should be rotating our money to. But to get the most bang for your buck, look no further than our screener -- and pick highly rated stocks that are between $150 million and $2 billion in market cap. One caveat: Since the small caps are volatile, waiting for a pull back and exercising good investing prudence may be in order.
