Joined Nov 11, 2007
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With Small Caps Hitting New Highs, Should You Go Gorilla or Go Home?

“Small cap stocks have been on a tear lately, rising to record highs as they outperform their larger brethren. But many experts say small caps have reached overvalued levels.

The Russell 2000 Index of small stocks reached an all-time peak Tuesday. Since Dec. 1, it has gained 11.5 percent, outdoing the Standard & Poor’s 500 Index, which has climbed 7 percent during the same period.

The difference is even more startling for the long-term. Since January 2000, the Russell 2000 has ascended 85 percent, compared with just 7 percent for the S&P 500, The Wall Street Journal reports.

Small caps have outperformed large caps for almost 14 years, the longest streak ever, according to Ned Davis Research. If history is any guide, there will be a reversal, the firm says.

Others agree. Small caps are “overvalued on most measures relative to large caps” and thus likely to suffer more in a market decline, Stacy Francis, a New York-based financial adviser, tells The Journal.

Comparing stock prices with per-share earnings and growth rates, William Callahan, a financial adviser in Omaha, Neb., estimates that small caps now trade at an 11 percent premium to large caps.

“You’re taking on more risk only to pay a higher price for every dollar of expected profit today,” he tells The Journal….”

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