《经济学周刊》：重申微笑的理由

Economics WeeklyRestating the Case for Smidcaps William BlairFor those of us who have believed that a rotation intothe smidcap stocks is coming, the performance over thelast year and through the first quarter has been disap-pointing; however, the return following the first quar-ter seems to offer a glimmer of hope. Since the end ofMarch, the S&P 500 has increased by 13.3% and is neckand neck with the Russell 2000, which has risen 13.5%(and is up 5.0% in July, compared to the S&P 500’s2.5%). Meanwhile, the S&P MidCap 400 is up 10.2%, andthe S&P SmallCap 600 rose 9.0%. Notably, the index thathas lagged all of these is the equally weighted S&P 500,which is up 8.1%.In thisEconomics Weekly, we onceagain make the case for why investors should shifttheir focus toward the long overlooked and under-owned smidcap stock.What Is Driving the Large-Cap Rotation?Throughout our career in finance, it has almost alwaysbeen taken as a fact that small-cap stocks outperformlarge caps over time; and it is this outperformance thatbalances out the extra risk involved when investing inmore-volatile smaller-cap stocks. Yet, looking at thecurrent CAGR from 1978 (as far back as we have compa-rable data) to today, the S&P 500 total return index hasincreased by 9.37% annually, compared to an increase of8.96% for the Russell 2000 total return index (exhibit 1).0(S&P 500 & Russell 2000, rebased to 100 December 1978)Exhibit 1 also shows that large caps have pulled ahead ofsmall caps on only two instances. The first was in the late1990s during the internet bubble period, and the secondhas been over the last year until today. Exhibit 2, however,shows that, at least since 1999, earnings growth for thesmall- and midcap indices continues to be well ahead ofthe large; hence, much of the heavy lifting has been donevia multiple expansion, as opposed to earnings growth. S&P 500Russell 2000Large Caps vs. Small CapsExhibit 1 Richard de Chazal, CFA +44 20 7868 44892While we are not suggesting that today’s large-cap surgeis a bubble akin to that of the late 1990s, we questionhow much longer large caps’ pace of growth can continue.For example, it is somewhat astounding that the marketcap of just one stock, Nvidia, is already over $4 trillion,or 1.2x greater than the market cap of the entire S&P400 midcap index and 2.7x the combined value of all 600stocks in the S&P’s small-cap index.There are a number of reasons the larger-cap stocks haveperformed so well in recent years. These include:•strong business models with proven returns;•more globalized reach in what was an increasinglyglobalized and brand-driven world, with powerfulnetwork effects reinforced by the growth in socialmedia;•large regulatory moats and regulatory capture;•the growth in passive investment and large flows intothe largest and most liquid names that are able toabsorb such flows; and•the growth of private equity, which has kept whatmight have been a much more dynamic smaller-cappublic equity market from acting as the traditionalincubator for future larger-caps stocks.Yet, many of the drivers for this large-cap rotation are nowstarting to lose steam, if not reverse entirely. This is open-ing up the playing field for investors to explore a broadswath of the market, including small- and midcap stocks. Richard de Chazal, CFA +44 20 7868 4489and positive earnings revisions. Today, without thesupport from the bond market, investors will need topay more attention to valuation as a necessary factor inbuilding an adequate risk premium.From this perspective, both small- and midcap stockslook very attractive. The current 12-month forward P/Eon the S&P 500 is 22.2x (24.8x trailing), which comparesto a 16.1x (17.8x trailing) multiple for the S&P 400 and a15.5x (17.2x trailing) P/E ratio for the S&P 600.As exhibit 4 shows, the relative valuation is still outsideits historical range and has only ever been as low as itis today back in the late 1990s. This is indicative of asignificant margin of safety, where plenty of bad newshas already been priced into smidcaps, giving them lessdownside risk. Other valuation metrics such as price-to-book value (exhibit 5) and price-to-sales look similarlyattractive (exhibit 6).0510152025300.50.70.91.11.31.51.71.92.12.3RecessionsS&P600 PE / S&P500 P/E RatioMedian 1993 - 2025 & +/- 1 Std. Dev.Relative P/E Ratio: S&P600 / S&P500Based on 12-Month Trailing EPSExhibit 40.91.41.92.42.93.43.94.44.95.45.9Price-to-Book Ratio for S&P 500, S&P 400 Midcaps, and S&P 600 SmallCapsExhibit 5 Six Reasons to Look at Smidcaps TodayWe think there are at least six reasons investors shouldpay attention to smidcap stocks today.1. Diversification and 2. ValuationThe first two relate to the fact that the stock-to-bond correla-tion has turned positive once again (exhibit 3). This is highlysignificant because it means that bonds no longer provideinvestors with the same amount of downside return protec-tion that they did when the correlation was negative.0.00.20.40.60.81.01.2Correlation Bet