US Markets

U.S. small cap stocks are poised to outperform during the recovery, fund manager says

Key Points
  • Premier Miton Fund Manager Nick Ford argued that since small caps tend to either underperform or outperform the S&P 500 in seven-year cycles, they might be due for a resurgence.
  • Ford said that a number of American small and mid-caps are "thriving" under the uncertainty of lockdown and would continue to do so as investors pursue greater "earnings visibility."
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A lot of small caps are thriving in current environment, fund manager says

U.S. small cap stocks are set to outperform the S&P 500 in the uncertain aftermath of the coronavirus crisis, according to Premier Miton Fund Manager Nick Ford.

Speaking to CNBC's "Squawk Box Europe" on Friday, Ford, who manages the Miton U.S. Opportunities Fund, said a number of American small and mid-caps are "thriving" under the uncertainty of lockdown and would continue to do so as investors pursue greater "earnings visibility."

Small caps typically have a market capitalization of between $300 million and $2 billion, while mid-caps are generally between $2 billion and $10 billion.

Ford highlighted education technology company Chegg as an example of a smaller growth stock which stands to benefit from students potentially being forced to study from home for a prolonged period, with the pandemic continuing to surge in the U.S.

However, he also argued that since small caps more broadly tend to either underperform or outperform the S&P 500 in seven-year cycles, they might be due for a resurgence.

"We are just exiting a seven-year underperformance cycle partially driven by the popularity of mega stocks, particularly the FAANGs (Facebook, Apple, Amazon, Netflix, Google), and investors have been forced into mega cap stocks because if you are benchmarked against the S&P 500 and you don't own Facebook, Apple, Netflix etcetera, you are going to trail the index, and that sucks money out of the small cap sector," Ford explained.

"Where we are now is a situation where valuations are at historic lows, we are towards the end of the cycle, and small caps will benefit from an economic recovery in the U.S. at a greater degree than many of the large cap stocks, which gave a substantial amount of overseas earnings, so investors looking for a domestic recovery play should definitely look at this space."

The S&P 500 was down 2.44% since the turn of the year going into Friday's trading session, while the S&P 600 Small Cap index was down 21.67%.