Jeff Mills, chief funding officer at Bryn Mawr Trust, is trying as a substitute to the smallest gamers on Wall Street for the subsequent supply of opportunity.
“With the market at all-time highs, it’s about looking where people aren’t and I think that’s small caps right now,” Mills instructed CNBC’s “Trading Nation” on Monday.
The Russell 2000, a standard benchmark for the small-cap group, has vastly underperformed the S&P 500 this yr. Since July, for instance, the index has fallen almost 4% in contrast with the S&P 500’s 4% achieve.
“In the beginning of the year what you saw were investors moving to small caps, moving to cyclicals because everybody anticipated this unabated economic recovery. I think as economic data started to slow down as delta started to come into the fray, I think people started to move away from that and actually huddle into large cap so that is the more crowded trade right now,” he stated.
The underperformance of small caps in opposition to massive has now introduced the group to its least expensive valuation on a ahead price-earnings foundation relative to the S&P 500 in the final 20 years, Mills stated.
“I do think there’s opportunity right there for a mean reversion trade as we move into the end of the year,” he stated.
But, not all small caps are created equal. Mills stated whether or not massive or small cap, traders ought to favor high quality.
“When I say quality, I mean high free cash flow yield, I mean realized earnings growth not necessarily projected earnings growth so you have to beware of traps both on the value side and the growth side, and this market is really differentiating between those things right now,” he stated.
In the case of small caps, the high quality differentiator marks the distinction between the Russell 2000 and the S&P 600 which Mills favors.
“I would rather be in an ETF like SLY [S&P 600 ETF] versus kind of the typical Russell 2000 and that is because of this quality bias. I think that’s going to continue to be the better performer,” stated Mills.
The SLY ETF has risen 19% this yr in contrast with the IWM Russell 2000 ETF‘s 13% improve.