Micro-Cap ETF And The Falling Greenback
The recent rise in the value of the U.S. dollar versus its peers could eventually hurt the large multinational companies, however the smaller guys may benefit.
During the third quarter the U.S. Dollar Index was up 7.7 percent, the second best quarterly gain since 1992.
As the greenback increases, it makes products produced in the U.S. more expensive for foreign buyers. On the flip side a stronger dollar could benefit the smaller U.S.-based companies that generate the majority of their sales in the country.
Approximately 77 percent of sales from the Russell 2000 companies from the U.S. versus more than 50 percent outside the country for the S&P 500 stocks.
With the small-cap stocks moving into correction mode this week and greatly underperforming their larger peers it appears it is time to look at bargains within the asset class. Drilling down even further to the micro-cap stocks will only increase the exposure to U.S. sales and offer unique opportunities to investors.
One option for investors is to take a broad brush and invest in the entire asset class of micro-cap stocks via an ETF. The iShares Micro-Cap ETF (NYSE: IWC) consists of 1,384 micro cap stocks, which are characterized by companies that have a market cap between $50 million and $300 million.
That being said, there are a handful of stocks in the portfolio that are well above the $300-million figure.
The top individual holdings include Avanir Pharmaceuticals Inc. (NYSE: AVNR) with a 0.60-percent holding, Tri Pointe Holdings Inc. (NYSE: TPH) at 0.58 percent, and Ambarella Inc (NASDAQ: AMBA) at 0.38 percent. The ETF is up 1 percent over the last year and down 10 percent over the last six months.
The sellers have been in control of IWC and the sector over the last few months as the ETF hit the lowest level since October 2013 this week. The ETF has an expense ratio of 0.60 percent.
There is also the option of investing in individual names, all of which are components of IWC.
Paycom Software Inc (NYSE: PAYC) is a cloud-based human capital management system that provides services like HR management, payroll and talent acquisition.
PAYC second quarter revenues increased to $32.7 million from $23.4 million one year earlier. Since going public six months ago, the stock up 3 percent. It had a rally starting in the beginning of August to the middle of September and has since pulled back to support around the 50-day moving average near $16.
Consolidated Communications Holdings Inc. (NASDAQ: CNSL) provides a range of communication services to residential and business clients. Some of their services include high-speed broadband Internet access, custom calling features and private lines. CNSL’s second quarter financials looks fairly similar to the same quarter a year prior.
Revenues decreased from $151.3 million to $151 million, while net income increased to $9.9 million from $9.3 million. The stock is up 42 percent over the last 12 months and 25 percent over the last six months. It has pulled back after a two-month rally has started to consolidate around $25.
BioDelivery Sciences International Inc (NASDAQ: BDSI) is a specialty pharmaceutical company that focuses in the area of pain management and addiction medication. BDSI was able to increase total revenue by five times in the second quarter. Going from $2.8 million last year to $13.9 million in the same quarter this year.
The company was also able to increase their cash and cash equivalents from $23.2 million to $78.4 million from the end of fiscal 2013. Cash on hand like this could allow BDSI to acquire smaller pharmaceutical companies and further pad their bottom line, among other things. The stock is greatly outperforming its peers with a gain of 247 percent over the last 12 months and 130 percent over the last six months.
Due to the small size of the stocks mentioned and the volatility that comes with micro-cap stocks the best option for most investors is the ETF. However, if individual stocks fit into a portfolio there can often be big winners in the smallest stocks in the market.
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