Microcap Index Outshines Dow & S&P 500

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Updated: Oct 02, 2020 3:12 PM

Microcap Index Outshines Peers as Bulls Drive the Markets Further.

Microcap, Microcap Index, NYSE , Facebook, Apple, Amazon, Netflix, GoogleCompanies in the microcap index typically have an average market capitalisation of $300 million, some of which are even lower.

Facebook. Apple. Amazon. Netflix. Google. These are legendary names for any investor around the world. Some call them by their market acronym FAANGs. In comparison, investors could dismiss the Nasdaq-listed Fangdd Network Group (DUO) as a non-entity.

Sometime in mid-June, curiously, the trading volumes in the real estate company shot past the roof. Its volume had shot up to 13X of that on an average day and it topped $4 billion in value. In the buying frenzy, no one tried to find a reason. As the stock cooled off the next day, some guessed that it was the resemblance to ‘FAANG’.

The stock surged from $10 to about $130. It is a market driven by bulls, everything seems to be running as traders rely on the old market wisdom – trend is my friend. Hence, stocks with a bull run get emboldened by more money.

As the major indices have surged from the low on March 23, the microcaps lagged behind. A little late in the market surge, they are more than making up for the investors. In the era of ‘Robinhood traders’, as street pundits refer to the newly minted investors, anything that moves up fast is a good stock.

Companies in the microcap index typically have an average market capitalisation of $300 million, some of which are even lower. Given their value is very low, these stocks draw strong interest among the average retail investor. Some of these stocks may not have reported a profit in the last quarter or two.

The Russell Microcap Index (RUMIC) tracks the smallest 1000 stocks that trade on Wall Street. These companies are typically not on the radar for institutional investors.

Investors make a beeline

Microcaps, by the scores, have been among the hottest trades in the market. Their returns have outperformed some leaders in the market. While some of these lesser-known companies catch investor attention because of news developments, others could just be like a shooting star.

Kodak (KODK), a sleepy stock after it lost its mojo, saw its value go up nearly 15X as it received a U.S. government grant to produce medical ingredients. The gains have now largely evaporated.

Microcaps, by the scores, have been among the hottest trades in the market. Their returns have outperformed some leaders in the market. While some of these lesser-known companies catch investor attention because of news developments, others could just be like a shooting star.

Zoom Video (ZM) has been on a roll, driven by its popular video conference platform. However, some investors ended up buying into the wrong company, Zoom Technologies (ZOOM) which made it pop up on traders’ screens because of the volumes adding further to investors’ interest. Ultimately, SEC suspended trading of the stock in March2020 after it had tripled over the past 5 weeks.

Among the list of microcap stocks that have seen smart gains include Workhorse Group (WKHS) that designs and builds battery electric vehicles, biotech company Vaxart Inc. (VXRT) makes products for oral flu, satellite communications company Maxar Technology Inc. (MAXR) serves customers in the U.S., biopharmaceuticals company Sorrento Therepeutics Inc. (SRNE) provides treatment for diseases, mobile entertainment products and online services company Digital Turbine Inc. (APPS) … the list is long.

For some companies, like Overstock.com, the smart gains caught the attention of institutional investors. Well-known hedge fund Renaissance Technologies bought a stake in the company during the second quarter.

As the microcap stocks made their presence felt in the market, in its dream run the Russell Microcap Index has outperformed the Dow and S&P 500.

Beating the S&P 500 is a dream for any index. The micro cap index has achieved that. As the market rebound took shape, a number of the micro cap stocks have also beaten the FAANG and other established market leaders. A bull run indeed gives rise to strange winners!

Investors need to be careful. For, if you were to pay heed to words of seasoned investors, leaders always show the way ahead in the markets.

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