From a March 6, 2010 WSJ article: “Finance professors Eugene Fama and Kenneth French have found that one in eight small growth stocks typically becomes large each year—and that these small stocks on the cusp of becoming big generate giant annual returns of as much as 62% on average.”
What’s a small cap stock? Investopedia gives these approximations:
Mega Cap – Market cap of $200 billion and greater
Big Cap – $10 billion and greater
Mid Cap – $2 billion to $10 billion
Small Cap – $300 million to $2 billion
Micro Cap – $50 million to $300 million
Nano Cap – Under $50 million
The Russell 2000 index of small cap stocks uses the same range, $300M to $2B. However, AOL’s stock screener classifies small cap as $250M to $1B. Market Watch’s screener is one of the few that allows a precise range of values, rather than selecting from a list of values, but does not have as much screening criteria as some sites. The screening tool at Yahoo Finance lists values for market cap which apparently follow AOL’s criteria for small screen stocks, with market cap gradations at $500M,$1B, then jumping to $10B.
At Yahoo, I ran a screen for stocks with a market cap between $500M and $1B, sales greater than $500M, a P/E ratio of 10 to 20 and a 5 year estimated EPS growth rate greater than 50%, or 10% a year. That criteria produced some companies just under $1B market cap that I wish I had invested in several months ago. While small cap stocks have risen a few percent this year, some of these stocks have risen 20 to 50%. Small cap stocks usually lead the way out of a recession and even though they have had a good run the past twelve months, there is probably more to come.
There seems to be an eternal debate and much research into this question: do growth funds and ETFs produce better returns than value funds and ETFs? It depends on the time period that one looks at. Here is a short 2007 article on the small cap value vs. growth.