At first, small-cap stocks seem like a bargain. But it deepens and the story gets complicated.
A common way to measure whether a stock seems expensive is to divide its price by the company’s profits. On the one hand, the Russell 2000 benchmark, whose members have an average market capitalization of about $ 3.3 billion, recently traded at about 19 times last year’s earnings, while the Russell 1000 large capitalization index was traded 25 times, making the small segment capitalization seem a deal.
However, when calculating the price-to-profit ratio, analysts sometimes, as in the figures just quoted, eliminate non-profit firms. This can have a dramatic effect on how costly a wide market segment appears, especially as the share of the small, non-profit capitalization index, high to begin with, increased after the pandemic-induced recession.
According to an analysis by Jefferies that analyzes the profits of the previous 12, for the Russell 2000 benchmark, leaving out unprofitable companies means leaving aside what last year accounted for more than a third of market value. of the small capitalization index. months.
In comparison, only about 8% of the Russell 1000 capitalization index, whose members have an average market capitalization of about $ 511 billion, was made up of unprofitable companies for the last time.