Bears Still Wrong: The Small-Cap Stocks Defying the Market Narrative

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From the bear’s internal monologue:

Today it is bad, and day by day it will get worse―until at last the worst of all arrives.

Arthur Schopenhauer, On the Suffering of the World

Thing is, the bears are still wrong.

Their day in the sun, or the gloom I should say, may come.

But there are reasons to be positive amongst all the supposedly conflicting signals.

And I think the narrative that the bears are pushing leaves you with a very narrow view of the stock market.

I’ll get to the names of the stocks that have caught my eye in a bit, but here’s the punchline:

Carefully selected small-caps stocks may be a good bet if/when the bears are finally right!

Now, I know you may be thinking that small-caps are riskier.

There may be something to that.

But this is more so if you are picking the wrong ones.

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Small-caps showing pivot to growth

Check out the performance of the S&P/ASX Small Ordinaries [XSO] (yellow line) against the performance of the ASX 200 [XJO] (orange line):

Port Phillip Publishing


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What’s the chart telling us?

Well, XSO took a bigger hit but is now neck and neck with its bigger peers in the XJO.

Meaning the pivot to growth is well and truly on.

And what’s the point of sitting on the sidelines when the Fed and the RBA are forcing your hand!

Three signals the bears are wrong

Now, I’m not saying you should be taking a punt on everything, but here are some signals that this run has legs:

  • Japanese PMI revised upwards
  • Nasdaq at new all-time highs
  • More US stimulus on the horizon

Japan’s debt-to-GDP ratio is certainly a concern, but the Bank of Japan’s (BOJ) experiments with monetary policy may be propped up by the fact that they still make stuff.

As for the Nasdaq, I’ve previously said that the Big Tech anti-trust probe in Washington will at worst result in a slap on the wrist, and the run could have another 10–15% in it.

I stick by that.

And guess what?

There’s more money about to be ploughed into the ailing US economy.

$1 trillion or $3.4 trillion, doesn’t really matter.

The Fed’s debasement of the dollar is not necessarily a sign of the end times…for now.

But nonetheless, the US dollar is getting absolutely smashed, as you can see on the chart of the US Dollar Index [DXY]:

Port Phillip Publishing


[Click to open in a new window]

DXY is heavily weighted towards the euro, and the euro/USD pair is going ballistic.

Does this mean that Europe is the place to be and the US is doomed?

Not necessarily, Europe will at some point need to deal with structural issues caused by negative rates.

But Europe is pushing hard at a ‘green’ recovery, which is showing up in the share prices of ASX-listed companies with exposure to the European EV market.

So, there’s a little pocket there…or a mini boom on the cards.

We’ve covered the e-commerce and BNPL mini booms extensively at Money Morning, with names like Ltd [ASX:KGN] and of course the likes of Afterpay Ltd [ASX:APT].

But the emerging theme for us is what’s happening with select commodities and small-cap miners.

Two small-cap miners taking off on forgotten commodities

So here are two more companies that have rocketed in the last week in this space.

For instance, there is Poseidon Nickel Ltd [ASX:POS], which bolted earlier in the week on the news that they’d hit some very high-grade nickel at their Golden Swan project.

Then there’s Pacifico Minerals Ltd [ASX:PMY], which is climbing on the back of higher lead and silver prices for their Sorby Hills project.

You can see the 60-day lead spot price and the 60-day silver price below:

Port Phillip Publishing

Source: Kitco

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Port Phillip Publishing

Source: Kitco

[Click to open in a new window]

So there you have it, two more metals with bullish charts, defying the market narrative that the sky is falling.

Be a smarter bull!

A final word about small-caps. Small caps can be volatile and risky.

The risk is greater if they are duds or poorly run.

A cashed-up small-cap with a breakthrough product, or one that is growing revenue, or its resource can move higher even if the wheels fall off the broader market…

This is where I’d be looking for companies that can weather the storm if the worst of all happens.

Positive news flow generally drives up share prices even when the macro picture looks dire.

The bears could be right, but it’s all about being a smarter bull.


Lachlann Tierney Signature

Lachlann Tierney,
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PS: Four Well-Positioned Small-Cap Stocks — These innovative Aussie companies are well placed to capitalise on post-lockdown megatrends. Click here to learn more.

About Lachlann Tierney

Lachlann Tierney is an Analyst for Money Morning and has been investing for nearly a decade. With a Masters of Science from the London School of Economics, he brings a sound understanding of global markets to his writing. Lachlann is interested in emerging technologies, energy solutions and helping people invest…

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