Power Play: Be overweight on this group of stocks

Traders on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders on the floor of the New York Stock Exchange.

One leading investment strategist said he believes the best power play for 2015 is in small cap stocks.

Sure, it's a contrarian thought since small caps fell out of favor last year after under-performing significantly.

Last year, small cap companies "did so poorly ... because investor culture became obsessed with 'global deflation risks'," said Jim Paulsen, Wells Capital Management chief investment strategist. Since small cap firms tend to run a "lean and mean" business with far smaller profit margins compared to their larger counterparts, the periods of weak top line pricing (such as disinflation or deflation) tend to be far more destructive to these smaller firms. Bigger firms are more likely to have "fluff which they can cut when price competition intensifies."

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But this year, Paulsen said commodity prices and global growth trends are "likely to improve which should lead to out-performance by small cap companies." Small cap company profit margins are leaner, which allows them to have far greater operating leverage to better top-line pricing, he said.

"Compared to larger companies with wider margins, a larger share of an additional sales dollar falls to the bottom line of small companies," Paulsen said.

"Time to overweight small cap stocks!" Paulsen said.