Not surprisingly, this year’s stronger performers include companies that saw an immediate benefit from the pandemic. These include Inovio Pharmaceuticals, a biotechnology company that is developing a coronavirus vaccine. Inovio plans to have one million doses of the potential vaccine ready for additional clinical trials or emergency use by the end of the year. Another holding, Limelight Networks, boasts an innovative content delivery network that enables businesses to deliver digital content across internet, mobile and social channels. Demand surged with the spread of Covid-19 as billions of people sheltered in place.

Looking For A Recovery Play
Because small companies are typically more sensitive to the level of economic activity than larger ones, they frequently get hurt to a greater extent during a market selloff. That happened during the global financial crisis between 2007 and 2008, and again earlier this year. Even after the recent market rout, large caps maintained a big lead. Between December 31, 2014, and April 30, 2020, the large-cap S&P 500 returned a cumulative 57.71% while the small-cap Russell 2000 returned 17.18%.

Korngiebel observes that large-cap returns over the last few years have been driven largely by a relatively few mega-cap names that have benefited from phenomenal success in technology and communications. While these companies face the risk of declining growth rates as they continue to mature, he says, the companies in his portfolio have an ample runway for growth and are priced competitively. “Based on price-to-earnings ratios, our analysis shows that today’s profitable small caps are undervalued relative to profitable large caps by one of the widest margins in over 20 years,” he observes.

He isn’t keen on predicting when small company stocks will produce better long-term returns than large caps, a pattern that prevailed until recent years. But he points out that over almost all one-year periods following recessions since the World War II era, small-cap stock performance surpassed large-cap names by a wide margin.

Once the country climbs out of the pandemic slowdown and a recovery begins, historical precedent points to a speedier, sharper recovery for smaller company stocks. “If the economy does well, micro-caps and small caps should also do well,” he says.   

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