With seven full trading days left in the year, investors are already drafting their 2015 investment playbook. And one of the biggest questions on Wall Street is which asset class will outperform in the new year -- large or small caps?
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Taking a look at the 2014 performance, small caps, or companies with less than $2 billion in market capitalization, have been trailing large caps so far this year. The S&P 500 is up more than 12%, while the Russell 2000 index is up just over 3% for the year.
But Jay Kaplan, Royce & Associates portfolio manager and principal with $4 billion in assets under management, tells FBN's Liz Claman small caps will catch up to their large-cap counterparts in the new year: “Large caps will face headwinds in 2015 because of their international exposure.” Kaplan adds that this will present an opportunity for the performance gap to tighten -- so investors should consider getting into small caps now while they’re still trading at the low range.
Jason Rotman, CEO and founder of Lido Isle Advisors, takes an opposite view, saying that large caps will continue to dominate in the new year: “It’s tough to fight this trend of large cap outperformance, and I believe it will continue in 2015." He tells FBN's Claman that small-cap valuations, which were already stretched coming into 2014, will likely fall back in-line with historic averages in 2015, while large caps valuations will still be playing catch-up -- which makes it more attractive for investors.
To find high-quality small-cap stocks, Kaplan, who manages the Royce Total Return Fund (RYTRX), scans the small-cap universe for companies with a strong balance sheet, high return on capital, and discounted valuation.
In terms of specific sectors, Kaplan turns to Banks, Technology and a sector that’s massively out-of-favor right now: Energy. “This is a good contrarian play -- high-quality energy services stocks will present solid returns over the three-to-five-year timeframe if investors have the stomach to ride out the downturn.” One of the energy names that Kaplan likes within energy services is Helmerich and Payne (HP), a name he calls a “highest quality land driller” with almost a 4% dividend yield: “This is a great stock to accumulate overtime for someone who has patience.”
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Kaplan’s other small-cap picks are TrustCo Bank (TRST), a $670 million market cap banking services provider that stands to benefit from higher interest rates, and PC Connection (PCCC), reseller of hardware and software with a $647 million market cap that’s enjoying the earnings boost from the PC replacement cycle.
In contrast, Rotman isn’t a big fan of the energy space right now, saying that there are safer places to put your capital: “Even though the dividend yields on many energy stocks are incredibly high, the question is will those dividends get pulled due to revenue and cash flow problems from falling oil prices?”
Instead, Rotman -- who is bullish on the market in 2015 with S&P 500 year-end target of 2275 -- recommends going for high-growth technology stocks, like Facebook (FB). Rotman believes the stock is headed to $100, an approximate 25% gain from current levels.
“Facebook is extremely forward thinking and it hasn't even realized its full potential of monetizing Instagram,” Rotman says. “The future is bright for Facebook.”