AVN 67.10 Increased By ▲ 1.97 (3.02%)
BAFL 29.87 Increased By ▲ 0.17 (0.57%)
BOP 4.07 Decreased By ▼ -0.38 (-8.54%)
CNERGY 3.73 Increased By ▲ 0.10 (2.75%)
DFML 12.25 Decreased By ▼ -0.29 (-2.31%)
DGKC 45.53 Increased By ▲ 0.13 (0.29%)
EPCL 46.99 Decreased By ▼ -0.01 (-0.02%)
FCCL 12.00 Decreased By ▼ -0.20 (-1.64%)
FFL 5.95 Decreased By ▼ -0.08 (-1.33%)
FLYNG 6.11 Decreased By ▼ -0.07 (-1.13%)
GGL 11.90 Increased By ▲ 0.10 (0.85%)
HUBC 68.49 Decreased By ▼ -0.17 (-0.25%)
HUMNL 5.75 Increased By ▲ 0.01 (0.17%)
KAPCO 25.24 Decreased By ▼ -0.01 (-0.04%)
KEL 2.13 Increased By ▲ 0.02 (0.95%)
LOTCHEM 25.43 Decreased By ▼ -0.01 (-0.04%)
MLCF 25.73 Increased By ▲ 0.13 (0.51%)
NETSOL 77.85 Increased By ▲ 0.64 (0.83%)
OGDC 88.09 Increased By ▲ 1.08 (1.24%)
PAEL 11.52 Increased By ▲ 0.31 (2.77%)
PIBTL 4.14 Decreased By ▼ -0.04 (-0.96%)
PPL 68.35 Increased By ▲ 1.83 (2.75%)
PRL 13.22 Increased By ▲ 0.11 (0.84%)
SILK 0.88 Increased By ▲ 0.02 (2.33%)
SNGP 41.72 Increased By ▲ 0.46 (1.11%)
TELE 7.97 Decreased By ▼ -0.10 (-1.24%)
TPLP 15.41 Increased By ▲ 0.16 (1.05%)
TRG 112.73 Increased By ▲ 1.41 (1.27%)
UNITY 14.12 No Change ▼ 0.00 (0%)
WTL 1.22 No Change ▼ 0.00 (0%)
BR100 4,142 Increased By 39.4 (0.96%)
BR30 14,939 Increased By 97.9 (0.66%)
KSE100 40,878 Decreased By -40.5 (-0.1%)
KSE30 15,088 Increased By 44.9 (0.3%)

Micro-cap stock surge shows investor risk taking, GameStop effect

  • The Russell Microcap index, whose components have a median market value of about $350 million, has climbed 26% nearly two months into 2021.
  • The micro-cap gauge ceded some gains during volatility earlier this week while other indexes held up better.
Published February 25, 2021
Follow us

NEW YORK: Some of the biggest winners on US stock exchanges so far this year have been their smallest members, partly fueled by the GameStop effect, but their gains could be particularly vulnerable if investors get skittish about equities.

The Russell Microcap index, whose components have a median market value of about $350 million, has climbed 26% nearly two months into 2021. That gain tops the 4.5% rise for the large-cap S&P 500, whose components' median market value is about $28 billion, and the performance of benchmark small- and mid-cap stock indexes.

The micro-cap gauge ceded some gains during volatility earlier this week while other indexes held up better. With relatively few shares available to be traded, micro-cap stocks favored by individual investors could be hit hard in a downturn.

"Because they are retail oriented, they are probably going to be a little more vulnerable with the risk-off days versus the risk-on days," said Chuck Carlson, chief executive officer at Horizon Investment Services.

Shares of smaller US-based companies, which tend to rely more on domestic business, are generally benefiting from hopes for a rebounding US economy fueled by widespread vaccinations. That economic optimism also lifted micro-cap stocks, according to investors, after the group long underperformed until last year.

A "speculative fever," as one investor put it, symbolized in wild swings of GameStop Corp shares, also could be fueling micro caps.

GameStop shares doubled on Wednesday, lifting their year-to-date gain to over 380% and the video game chain's market value to $6.4 billion. That puts GameStop, whose shares are in the iShares Micro-Cap ETF, above the value of some S&P 500 companies.

There has been a "fundamental basis" supporting micro caps' strong performance, said Walter Todd, chief investment officer at Greenwood Capital. But, he added, "historically you would say that is one of the riskier parts of the market and the fact that it has moved so aggressively ... is emblematic of high risk appetite."

More than 80% of the components of the iShares Micro-Cap ETF had posted gains in 2021 as of Tuesday, against over 60% of those in the SPDR S&P 500 ETF, according to Refintiv data.

Among stocks on the New York Stock Exchange and Nasdaq, those that started the year with market values of less than $500 million were up an average 34%, triple the gain of those above $500 million, according to Refinitiv data.

Big micro-cap gains this year include a 177% rise for shares of Esports Entertainment Group and a 178% surge for Energous Corp, a wireless charging company.

"The speculative fever is out there," said Eric Kuby, chief investment officer at North Star Investment Management, which has run a micro-cap fund for over 20 years. As long as that persists, he said, "it's good for this class of stocks that are speculative in their nature."

Since Pfizer's breakthrough COVID-19 vaccine news in early November, the Russell Microcap index has soared 54% against a nearly 12% rise for the S&P 500.

Until then, the micro-cap index had fallen 2% in 2020 against the S&P 500's nearly 9% rise, after lagging the S&P in the prior three years.

"You are coming out of this incredibly long period of historic underperformance going into the pandemic," Kuby said. "One could argue after that period of underperformance, a lot of them had gotten very inexpensive."

Small-cap funds, which include micro caps, have seen nearly $23 billion in net inflows starting in November after six months of outflows, according to Lipper data.

"They are cheap stocks, they are getting fund flows, they fit some of the themes that I think people are interested in," said Steven DeSanctis, equity strategist at Jefferies.

Investors noted that money flowing to micro-cap stocks can create outsized moves because they have relatively few shares available to be traded. Micro-cap stocks have an average free float of about 29 million shares compared with an average of about 600 million shares for S&P 500 stocks, according to Refinitiv data.

"Micro caps are particularly unpredictable," said Joel Schneider, deputy head of portfolio management at Dimensional, "but they do go through periods of very strong performance."


Comments are closed.

Micro-cap stock surge shows investor risk taking, GameStop effect

Imran gives consent to call all parties conference to discuss elections: Fawad

Terrorism cases: Imran Khan granted protective bail by LHC

Rupee makes minor gain against US dollar, settles at 283.92

Pakistan careening towards potential default if IMF aid does not arrive: Bloomberg

Oil rises for second day as banking fears ease for now

Three soldiers martyred in DI Khan attack: ISPR

Xi calls Russia ties priority on Moscow trip

Auto sector woes: Hinopak suspends assembly plant operation

Auto financing dips for eighth consecutive month

IMF bailout not a silver bullet for Sri Lanka, says Moody’s Analytics