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Year End Review: Small Cap Stocks

By Craig AdeyanjuStock MarketsJan 17, 2017 06:19AM ET
Year End Review: Small Cap Stocks
By Craig Adeyanju   |  Jan 17, 2017 06:19AM ET
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Small cap stocks have been on fire this year, and it looks like 2017 could be an even better year for them when Trump takes office in January. The Russell 2000 Index ended 2016 up 19.48%, and outperformed the S&P by nearly 10% and the Nasdaq-100 Index by over 10%.

There were a number of reasons why the small-cap space outperformed mid- and large-caps in 2016. 2017 is a big year for U.S. small-caps due to the potential change in regulations and planned corporate tax rate cut. Trump’s plans could boost small-cap companies’ revenues and earnings, which would push their share prices higher.

Trump has a protectionist mindset and argues for less global trade, U.S. small-cap stocks could generate more sales since smaller companies tend to generate only a minor portion of their earnings from overseas sales. Less global trade will squeeze mid- and large-cap companies’ profit margins, and in turn, this would benefit small-cap companies’ margins.

Now, Trump’s tax reform is one of the main factors that should boost small-cap stocks. Trump’s tax plan was one of the main focus points of his campaign, and it’s his main priority for the first 100 days as U.S. President. What does this mean for small cap stocks? Higher potential gains.

Small caps are typically taxed in the U.S. at a higher tax bracket than mid- and large-cap companies with sales overseas. If Trump is able to lower corporate taxes significantly, the valuations in small cap names would look highly attractive.

Corporate Tax Rate
Corporate Tax Rate

Take a look at the analysis above, if the new effective tax rate falls to approximately 15%, the S&P SmallCap 600 Index earnings are estimated to grow by 23.1%, while the S&P 500 Index earnings are estimated to grow just by 18.2%.

That being said, let’s take a look at some of the memorable trades in the small cap space, in 2016.

A Small-Cap Stock Expert Weighs in on the Performance

One small cap expert, Jason Bond, who has various training programs and provides newsletters, capitalized on a small-cap stock in 2016. Jason wasn’t always a small-cap expert. However, with hard work, dedication and a good mentor, he went from being a New York state elementary school teacher with no net worth and a massive student loan debt to an expert in the space.

According to Jason Bond, he anticipates a good first-half performance from stocks in 2017. He stated in a report,

I anticipate a good first-half for stocks in 2017, with FANG (NASDAQ:FANG) stocks underperforming, while industrial, commodities, defense and gold stocks leading the way. I mention gold stocks in my short list, because I also anticipate consumer price inflation to accelerate during the first six months of 2017.

Now, Jason Bond had an impressive trade in Fannie Mae in November 2016, and here’s a look at its performance during the fourth quarter of 2016. Bond got long this stock after the election results came out. However, nearly a year ago, he suggested that Trump fully understood how shareholders of Fannie Mae suffered due to the US government. That’s not too hard to conclude, and is why the stock soared following his win at the polls.

Federal National Mortgage Association (Fannie Mae)

Fannie Mae (OTC:FNMA) was one small-cap stock that had impressive returns in 2016. FNMA ended 2016 up an impressive 137.80%, outperforming many large cap stocks. Now, this meteoric rise was primarily driven by Trump’s unexpected win and selection of former Goldman Sachs partner Steven Mnuchin as the next U.S. Treasury Secretary. Mnuchin aims to privatize FNMA and Feddie Mac under the Trump administration, which should increase FNMA’s profit margins.

Large hedge funds were also in on the action. Pershing Square (NYSE:SQ) and Paulson & Co. bought large stakes in both FNMA and Freddie Mac, expecting that these government sponsored enterprises would be privatized.

Now, FNMA surged from approximately $1.70 per share to $5 per share in just a matter of weeks, but slightly pulled back thereafter, as shown in the chart below.

Fannie Mae 60 Minute Chart
Fannie Mae 60 Minute Chart

Source: TradingView

Advanced Micro Devices (NASDAQ:AMD) Inc.

2016 was a great year for Advanced Micro Devices Inc (NASDAQ:AMD) shareholders. AMD ended up an astonishing 295.12% in 2016. Additionally, it’s up 370.22% over the past year, as of January 13, 2017.

Take a look at AMD’s impressive move in 2016:

Advanced Micro Devices Daily Chart
Advanced Micro Devices Daily Chart

Source: TradingView

The stock is still trending higher, and it’s starting to get more competitive with its rival chipmakers, Intel, Nvidia and Qualcomm. AMD unveiled its innovative Zen microprocessor technology during the summer of 2016, and it’s expected to be released to the public during the first quarter of 2017. AMD’s new release coupled with the potential corporate tax cut should increase its profit margins, and in turn, its stock price should rise.

The Chemours Company

The Chemours Company (NYSE:CC), a spin-off from DuPont (NYSE:DD), generated remarkable returns in 2016. Chemours Co. ended up a remarkable 314.37% in 2016, and significantly outperformed major indices. Additionally, as of January 13, 2017, Chemours was up an immense 657.88% over the past year. Again, this was fueled by Trump’s corporate tax plan, as well as his appointment of Dow Chemical CEO as the head of Manufacturing Council. The selection of Dow Chemical CEO Liveris to head Manufacturing Council could benefit the chemicals industry with the potential deregulations.

The markets were quick to price this in, as shown in the chart here:

Chemours Company Daily Chart
Chemours Company Daily Chart

Source: TradingView

The Bottom Line

Small cap stocks outperformed mid- and large-caps in 2016, and 2017 should be better for the small cap space. Now, the spectacular move higher was primarily fueled by Trump, and if all his plans are properly executed, small cap stocks could continue their remarkable run.

Year End Review: Small Cap Stocks

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Year End Review: Small Cap Stocks

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