Are Small Caps A Better Bet In The Current Environment?

Are Small Caps A Better Bet In The Current Environment?

Are Small Caps A Better Bet In The Current Environment? by Estimize

The fourth quarter earnings season, in a word, has been underwhelming. The S&P 500 index reported a decline in profits of 1.8%, with revenues down 3.5%. Those figures make it the worst earnings season since 2009, and firmly put us in a revenue recession, with the last four quarters recording negative sales growth. We also just marked our first down quarter for EPS since the recession, with the next few quarters also predicting negative numbers. Only 55% of companies were able to surpass the Estimize EPS consensus during the fourth quarter, with a much lower 41% beating on the top-line. While the large caps were not able to perform, fundamentals for many of the small caps remained strong.

Li Lu
In April, Li Lu and Bruce Greenwald took part in a discussion at the 13th Annual Columbia China Business Conference. The value investor and professor discussed multiple topics, including the value investing philosophy and the qualities Li looks for when evaluating potential investments. Q3 2021 hedge fund letters, conferences and more How Value Investing Has Read More
Small Caps Q4 2015 S&P 500 Estimated Growth


Small caps, those companies with a market cap under $2B, often don’t have the global exposure that large caps do. Close to 50% of S&P 500 revenues come from overseas. These multinationals have been under severe pressure lately as the global economy weakens, and the strong dollar negatively impacts repatriation of sales from outside the US. Some of the smaller, under the radar stocks, specifically in tech sector, have been a better bet in the current environment. These names often get buried and have limited analyst coverage, but the Estimize Screener accurately identified several companies that were likely to be beats this quarter, and with only a couple of weeks left in the season, there are others with that carry that same bullish signal.

A lot of the wins this quarter were in small cap tech companies. Some of our favorites include those in the enterprise tech space, such as Zendesk. Companies are continually investing in the cloud and in their own growth, and Zendesk offers customer service tools and products that are becoming critical for business efficiency. While the company only reported EPS in-line with the Street, revenues beat by a lofty $2.5M, resulting in YoY sales growth of 63% and the eighth consecutive quarter above the 60% mark.

Small caps

Lesser-known cybersecurity names such as Cyberark and Imperva also had a great season, both beating on the top and bottom-line, and putting up 40%+ YoY growth for both of those metrics. In many ways they looked much stronger than some of their larger competitors.

Small caps

This trend has not been limited to the tech space, even some small cap industrials saw strength this quarter, a sector that has otherwise been lagging. Taser, the maker of body worn cameras, beat the higher Estimize consensus by 45% on the bottom-line, and by $5.8 million on the top-line. The company confirmed they were receiving massive orders for their Axon body cameras and their digital evidence management system. Even domestically focused consumer discretionary names have been looking strong, with Zoes Kitchen growing 32% on the top-line, receiving an extra boost from Chipotle’s food safety scare.

Even though this season is almost finished there are still some of these small names that look like good opportunities ahead of Q4 earnings releases. In tech, names like Everyday Health and Pure Storage are both showing an EPS consensus that is trending higher into the report, and at least a 10% positive delta between Estimize and Wall Street. Restaurants also have a presence next week, with Shake Shack and Pollo Loco reporting. The Estimize community currently expects both of those names to beat on EPS and revenues.

Small caps

However not all small caps are winners, and we’ve seen some rough guidance pull down estimates leading into reports. Many of these instances can be found within the consumer discretionary sector as US consumers have become incredibly choosy with how they will spend their money, and more value-driven than ever. This has lead to stiff competition in the space. One such name getting a bearish signal from the Estimize community ahead of earnings is Skull Candy, maker of headphones, speakers and other accessories, which is expected to post a 1 cent miss on the bottom-line and a $1M miss on the top-line when they report next week. Other small cap consumer names feeling the pinch include Jamba Juice and Restoration Hardware, both have seen estimates come down leading into their reports and currently have an Estimize consensus that predicts a miss.

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