Among small companies, more opportunities are to be found in cyclical stocks, which are affected by macroeconomic changes and whose returns follow the economic cycles. Such companies include those in consumer goods, industrials and manufacturing. Small caps in defensive stocks, such as utilities and REITs, which people turn to for safety, are less attractive now, Gannon said.
Although small caps are more susceptible to volatility—or maybe because they are—the stocks can be held for long periods of time. “Our horizon is three to five years, and in some cases longer,” Gannon said.