In a recent note from Goldman Sachs (NYSE: GS) to its clients, investors were warned that the bull market for small caps could be ending.
According to Goldman Sachs:
The Russell 2000 has historically outperformed the S&P 500 during periods of accelerating EPS growth, expanding P/E multiples, and a strengthening dollar. We expect S&P 500 EPS growth to decelerate to 8% in 2014 from 11% this year, and that P/E multiple expansion has largely run its course. The current S&P 500 forward multiple of 15x is in line with our year-end 2014 forecast level.
As detailed in previous articles, there are a number of individual small caps that should do well, no matter what happens with the indexes.
North American Oil
Octagon 88 (OCT: OCTX) is up strongly in recent market action due to bullish news for its holdings in Canada. On Monday, it spiked upwards due to the company offering its plans for production at the Manning Project. This small cap oil and natural gas firm has huge potential. The rise in the stock price shows that Wall Street agrees.
It is the same with Americas Petrogas (TSX: BSE), another play on the Canadian oil sector. Since writing about Americas Petrogas in earlier articles, the stock has jumped. Management of the company has hired an investment bank to advise on measures to enhance shareholder value. That is a very bullish move, too.
Another small cap natural resource company like Octagon 88 and Americas Petrogas is Wishbone Gold PLC (OTC: WISHY). There is a bullish outlook for Wishbone Gold PLC due to a promising report on its holdings in Australia. The position of Wishbone Gold PLC in Australia will allow for it to prosper from the economic growth in Asia. The world’s two largest consumers of gold are India and China.
Companies Impacted by ObamaCare
Continuing to grow in both revenues and locations, Labor SMART (OTC: LTNC) just had another record quarter. The demand labor firm should continue to grow due to trends in the American economy. The Affordable Care Act, or ObamaCare, has firms hiring more project workers due to the higher costs of fulltime employees. That is very bullish for Labor SMART as companies will need more workers on a temporary basis.
The Trouble With Small Cap Stocks
It requires more effort to profit from buying and selling small cap stocks.
There is not as much coverage by Wall Street analysts. It can be difficult to find research on the companies. It is also tough to track down media coverage that is part of the due diligence process.
But that is what leads to higher profits for determined investors.
Warren Buffett has done very well investing in smaller companies. He realized the profit potential and was willing to put in the time and effort. That dedication eventually made him one of the richest men in the world with a net worth of over $50 billion.
Will investing in Octagon 88, Americas Petrogas, Wishbone Gold PLC, and Labor SMART make you richer than “The Oracle of Omaha”?
But it could lead to higher profits than many other sectors will yield. Small caps have traditionally outperformed other groups of stocks. Americas Petrogas, Octagon 88, Wishbone Gold PLC, and Labor SMART are already proving Goldman Sachs wrong!
What are your thoughts on the bull market and the impact on small cap stocks?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.