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Why Third Quarter Results Say Buy Small Companies Now (EMAN, PTEN, PDC, FXEN, GDXJ, NVO)
10/14/2011 2:02:00 PM
By: Wyatt Investment Research
Russell Sector Performance as of September 30,
The above is the classic risk-off trade. That was the bad news for those who were long small and micro cap stocks.
This pain does have an apparent remedy. Time - and we're not talking years. That's the good news, and the basis for my statement that adding small cap exposure now is worth the attendant risk.
Consider the following:
These are compelling stats from Credit Suisse and tell me to buy small cap stocks first, and ask questions later. We all know that past performance is not a guarantee of future results, but, on the other hand, history does have a way of repeating itself, as the above statistics show.
It's always good to temper enthusiasm with a healthy dose of reality before entering stock orders however. And the biggest downer right now is that between October 1st and Thursday's close, the Russell has already moved 14.7 percent higher. While I appreciate the market's support on my call to buy stocks Monday, this move suggests that the index will be flat for the remaining part of the quarter.
So I'm not taking the above data as a fool proof sign that it's time to jump into the market with everything I've got today, and neither should you.
But is it a time to add a little exposure? Heck yes. And it's the individual stocks that risk-tolerant investors should be looking at. These are the ones that were hurt the worst during the third quarter, and have yet to fully recover. As always, average into positions, and only invest money that isn't needed for at least a few years, preferably five or more.
I know names are important. To support my points check out eMagin Corporation ( EMAN ) , up 73 percent since the end of the third quarter, Patterson-UTI Energy (Nasdaq:PTEN) , up 17 percent and Pioneer Drilling ( PDC ) , up 37 percent. I don't own any of the above.
Stocks that I did purchase shares of last Thursday include small cap FX Energy (Nasdaq: FXEN) , the Market Vectors Junior Gold Miners ETF ( GDXJ ) , and large cap Novo Nordisk ( NVO ) , which pays a modest dividend, as well as a small oil services company that I won't name.
The various reasons for owning any of the above are naturally dependent on individual investor strategies, preferences, time frames and so on. Mine are sure to be different from yours.
Eventually, company specific fundamentals will drive share price performance. Buying shares when fundamentals have been tossed out the window, as in recent weeks, just makes good sense to me. It should to you too. Already, it appears that fundamentals are beginning to matter again. That's a positive sign.
Has the market bottomed? Who knows - cheap stocks can always get cheaper. And the past week could prove to be just a short-term bounce in an emerging bear market.
But the the risk-reward profile of many small companies right now is extremely compelling - far too compelling to pass up.
Until next time,
Tyler Laundon, MBA
Lead Research Analyst
Disclosure: Author owns shares of FXEN, GDXJ, and NVO