Global Fears and Small Caps: How Much of an Impact?
Many small cap investors believe that small caps are mostly, if not completely, immune to foreign crises and pressures, as most or all of their business is domestic. However, this may not be true at all. Small caps do have less international exposure than large caps, but for some companies, there may be more exposure than originally feared. Research from Credit Suisse shows that about 19% of small cap revenue comes from international exposure, compared to large caps being about 32% exposed. They do note that 56% of Russel 2000 (NYSE: IWM) stocks are completely domestic, and this may be a place that investors choose to hide out to weather the storm.
Financials (4%), healthcare (6%), and utilities (1%) are the lease internationally exposed sectors, so these may be good places to hide out ex-financials. As domestically focused as small-cap financials are, deteriorating credit conditions caused by increasing international pressures will hurt all financials, so it may be best to focus on healthcare and utilities.
CS also mentions a list of stocks that they rate outperform and have zero international exposure. This list includes: Boyd Gaming (NYSE: BYD), Two Harbors Investment (NYSE: TWO), which is a mortgage REIT, Accretive Health (NYSE: AH), Medivation (NASDAQ: MDVN), Boingo Wireless (NASDAQ: WIFI), and Black Hills Corp. (NYSE: BKH).
They also point out that a weak dollar generally equates to weak small caps relative to large caps, so the recent dollar strength may also be hinting at future small-cap strength.
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