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Quietly, solar energy is leaping from rooftops and backyards to electrify entire cities. Utility-scale solar power in the U.S. increased by 227% from 2010 to 2013 – and solar plants are now under construction that will equal the output of typical coal-fired plants. This is a genuine supertrend, and 3 solar stocks are leading the charge. Want their names? Full details.
| | | 12/31/2014 By Chad Fraser 
Strictly defined, small cap stocks are companies with relatively small market capitalizations (or the total value of all of their outstanding shares).
The line between small caps, mid-caps and large caps has shifted over time and varies depending on whom you ask, but today's small caps generally boast market caps of $250 million to $2 billion. Companies below $250 million are commonly referred to as "micro-caps," while the smallest of the bunch (less than $50 million) are considered "nano-caps."
No matter where you draw the line, small caps offer a tantalizing benefit to investors: the prospect of higher returns than large caps.
Or as legendary Fidelity mutual fund manager Peter Lynch put it: "Big companies have small moves, small companies have big moves."
A commonly used benchmark for small caps is the Russell 2000. This index reflects the performance of the smallest 2,000 companies in the Russell 3000, which consists of the 3,000 biggest U.S. companies, or roughly 98% of the investable U.S. equity market. The Russell 2000 comprises about 10% of the larger index's market cap.
Small caps have lagged their large cap cousins this year, though they have ended 2014 on a stronger note, with the Russell 2000 outperforming the S&P 500 in the last three months.
And small cap investors are often rewarded for their patience: since the market low of March 2009, the Russell 2000 has gained 253%, compared to a 207% rise for the S&P 500 and a 175% gain for the Dow.
Over the very long term---all the way back to 1926---small caps outperformed their large cap cousins by 2.38% on an average annual basis up to the end of 2013, according to numbers from Deutsche Asset & Wealth Management.
Risks and Rewards of Small Cap Investing
There are a number of reasons why small caps can produce bigger gains than large caps. Here are four: - Small caps tend to be under-followed by Wall Street, which leads to investor neglect and undervaluation. When the investment community finally catches on, stock prices can move up in a hurry.
"It doesn't pay for Wall Street analysts to cover stocks unless they can generate enough revenue (read commissions or future investment banking fees) to make the time and effort involved worthwhile," wrote Joel Greenblatt of Gotham Capital in his 1997 book, You Can Be a Stock Market Genius.
"Therefore, smaller capitalization stocks whose shares don't trade in large volumes, obscure securities and unique situations are generally ignored. Ironically, the very areas that are uneconomic for large firms to explore are precisely the ones that hold the most potential profit for you."
- The law of large numbers: "It's much easier to grow 50% to 100% per year when starting from a small base than it is when starting from a large base," wrote Jim Fink, chief investment strategist of our small-cap-focused Roadrunner Stocks advisory in a January 2013 article.
"Investing in the next Wal-Mart won't happen by investing in Wal-Mart itself. Otherwise, large cap companies with $100 billion-plus market caps would quickly grow larger than the economy itself!"
- Smaller firms have less bureaucracyand overhead, so they tend to be nimbler than large caps. That helps them keep their earnings growing in a changing economy.
- Many smaller firms offer innovative products and operate in new markets where competition is initially low. This makes it easier for them to raise prices, paving the way for higher profit margins.
Even so, there are a number of things investors need to keep in mind when investing in small cap stocks. For one, they typically experience higher volatility than their larger counterparts, partly because they're more thinly traded.
Small caps can also fall faster than large caps in a declining market and are more prone to economic shocks, because they lack the economies of scale that large caps enjoy, and they have a less-diversified geographic footprint and customer base.
Dividends are also rare in the small cap universe, as companies prefer to plow their profits back into the business to fuel their growth.
What to Look For
To reduce risk and zero in on potential small cap winners, Fink recommends that investors focus on investment quality, looking for things like low debt, rising earnings, persistent free cash flows and revenue growth.
Here are some other factors he likes to see before recommending a stock: - Impressive management:"The greatest idea or breakthrough product means nothing unless you've got smart, dedicated people running the show---preferably the founder," he says. "I've made more money investing in firms with sharp managers and so-so products than in companies with great products and mediocre management."
- Strong operating margins:Unlike earnings, operating margins can't be manipulated, says Fink. That's why he considers them a good measure of a company's true profitability.
- High insider ownership:"I want management to be partners with us on a stock," Fink says. "It's a key Buffett rule: owner-operators want the stock to go up as much as you do."
Discover the $6 Stock That Could Turn $10,000 Into $214,290
Most investors don't know it, but there's a new battle brewing in Silicon Valley. On one side are industry giants like Microsoft and Qualcomm. The other boasts titans like Panasonic, Samsung, Sony and Toshiba.
At stake? A brand new $10-billion data market.
Here's the best part: Small cap investing expert Jim Fink has zeroed in on a tiny company that's figured out a way to make money no matter who comes out the winner. That gives it the potential to turn every $10,000 you invest into a life-changing $214,290!
Click here for the full surprising story. | | |
Just days ago I pulled the wraps off a special report that details a tiny $5 tech stock. I rushed to get this exclusive report out before the end of the year because I believe it's poised to hand early investors gains up to 2,042%.
Just days later, it shot up 15%.
The good news is there's still time to get in on the action. Recent events have made it perfectly priced – so you have to hurry. Every day you wait could cost you thousands of dollars in profits. If you've been looking for a way to bank life-changing gains, this is your opportunity. When this company hits its stride, the possibility exists for it to turn every $10,000 invested into $214,290. I'll give you the lucrative details here.
| | | 12/31/2014 By Robert Rapier 
This year has been a tale of two halves in the energy sector. The Energy Select Sector SPDR (NYSE: XLE) was up 13.2% through July 1, versus a 6.8% gain for the S&P 500. But between July 1 and Dec. 26, the Energy Select Sector SPDR was down 20%, versus a gain of 5.9% in the S&P 500. This underperformance was a product of broad declines in the energy sector. Oil producers, oilfield services providers and drilling companies were especially hard hit. In fact, most of these stocks fared worse than the Energy Select Sector SPDR since it is heavily weighted toward larger, integrated companies: Top 10 constituents of the Energy Select Sector SPDR
But the energy sector is extremely diverse. Not all segments trade in unison. Even in a lousy year there were solid performances.
I used Fidelity's stock screening tool to evaluate the performance of energy stocks. Of the 514 listed in the energy sector, 114, or 23%, had positive total returns for the year. A number of stocks more than doubled in value, but those all had market caps under $500 million. So I restricted the screen to companies with market caps of more than $500 million trading above $5 per share. With those restrictions there were still 82 stocks with positive returns. Here are the top 10, and there is clearly a common theme among these top performers: 
The top 10 was dominated by master limited partnerships (MLPs), with eight entries on the list. Another, Cheniere, owns MLP interests. MLPs issue units rather than shares, but more importantly have distinct tax advantages over corporations. The primary advantage is that MLPs aren't subject to the corporate income tax. MLPs pass profits directly to unitholders in the form of quarterly distributions. This arrangement avoids the double taxation of corporate dividends.
The only entry on the list that was not an MLP or affiliated with an MLP was the top performer, Westmoreland Coal (NASDAQ: WLB). The coal sector has been battered in recent years, but Westmoreland, the sixth largest North American coal producer, bucked the trend with a total return of 81.6%. The second leading performer with a total return of 80.7% was Phillips 66 Partners (NYSE: PSXP). This partnership is comprised of midstream assets dropped down from its sponsor, the refiner Phillips 66 (NYSE: PSX) in a 2013 IPO. In third place was Tallgrass Energy Partners (NYSE: TEP), another 2013 IPO. Tallgrass provides natural gas transportation and storage services for customers in the Rocky Mountain and Midwest regions of the U.S. Coming in fourth was Cheniere Energy (NYSE: LNG) which owns 100% of the general partner interest and 47.2% of the limited partner interest in Cheniere Energy Partners (NYSE: CQP). Cheniere Energy and its affiliates are involved in building terminals for the export of liquefied natural gas. Rounding out the top five was MPLX (NYSE: MPLX), which like PSXP was formed from midstream assets dropped down from its sponsor, the refiner Marathon Petroleum (NYSE: MPC). The rest of the top 10 consisted of midstream (i.e., pipeline and transportation) MLPs except for Emerge Energy Services (NYSE: EMES). Emerge is primarily a domestic producer and supplier of sand used for hydraulic fracturing in U.S. shale basins. The fracking sand securities have been extremely volatile. Emerge's entry on the list comes despite a decline of nearly 60% since the end of August. Overall, 2014 will go down as a poor year for the energy sector, but some segments and stocks will always outperform the broader market averages. In 2014 it was the midstream MLPs, in particular, that performed extremely well. This article originally appeared in the The Energy Letter column. Never miss an issue. Sign up to receive The Energy Letter by email. | | |
Over the course of history, the average time between 20% corrections is 635 days. We're currently at 1,358 days. Time is running out for you to protect your portfolio. Here are five stocks to get you through any market. Click here.
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