The sharp retreat in certain parts of the market over the past few weeks has been very cruel to micro caps. According to Russell data, their Micro Cap Index, which consists of the bottom 1000 names in the Russell 2000 in terms of market cap as well as the next 1000 names, is down 5.17% in May, which is sharply lower than the return on the S&P 500 of 2.06%.
The Russell 2000 index of small caps is down 4.13%, suggesting that the smaller the stock, the worse it is getting hit. Why? I believe that a couple of things are going on, including a flight to quality/liquidity, which is reflected in the strengthening dollar, rallying Treasuries and the strong performance of certain sectors like Utilities and Healthcare, and relative pessimism among smaller investors who typically have more impact on smaller stocks than larger ones.
With this in mind, I wanted to design a screen to identify dirt-cheap smaller companies. Here is what I did (and why):
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