Although small-cap stocks may have underperformed recently, the bull market’s not over yet, and small caps should outperform large caps, said Jim Furey, managing partner and chief investment strategist with Furey Research Partners.
He made the case for investing in U.S. small caps at a recent Pembroke Private Wealth Management luncheon.
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What the U.S. Federal Reserve does goes a long way toward determining asset prices, said Furey, explaining that with economic stimulus, stocks tend to go up. The most important person—“other than my wife,” he quipped—is Fed chair Janet Yellen, and she’s friendly to financial assets. “She continues to move the goal posts.”
While the U.S. economy may not be perfect, it’s the one of best of the economies in the world, said Furey. “We’re going to be in one of these areas where the economy’s pretty darn good, the Fed’s going to be in a position where it doesn’t want to raise rates, and investor are going to be in a position where they have to buy stocks.”
In fact, there’s a certain level of fear and pressure among investors to buy stocks—”because you can’t make any damn money elsewhere,” Furey explained. And small caps remain relatively inexpensive compared to U.S. government bonds, he said, adding, “small is attractive relative to larger and as attractive as it’s been in 12 years.”
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Energy and biotech
But where, exactly, should you be investing? Furey recommends the energy and biotech sectors.
“The decline in the price of crude is a godsend for the consumer,” he said, explaining the drop in oil prices, while it may lead to layoffs, will be more than offset by consumer spending. “Future prices are higher than current prices,” he said. “That reflects a degree of optimism.” However, he cautioned, “there are going to be trading opportunities in energy, but don’t fall in love.”
Biotech is another sector investors should focus on. It’s been going up in a linear fashion for the last five years, said Furey. “If you didn’t own biotech, you were really struggling.” For example, he explained a Phase III drug trial (i.e., the final stage of drug’s approval, pending approval from the Food and Drug Administration) is valued at US$950 million. The value of a drug that gets approved? $3 billion—and the approval rate is about 60%. “Goddamn things are still cheap,” he said, noting the biotech sector can go higher, but it can be hard to identify the right investments.
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In a changing economic environment, he believes there are opportunities for active managers in the small-cap space. “I’m optimistic stock prices are going to go up, small is going to lead large, you’ll get some return from the dollar,” said Furey. “It’s not without risk…but there’s no place to make money.”