The Small Long

Michael Burry, who rose to fame by betting against mortgage backed securities before the financial crisis of 2008, made headlines recently with comments that the mania for passive index products is creating a bubble and that small-cap value stocks may be the big winner when it eventually pops.
 
With all due respect to Burry, it is a case we have been making for some time. A look at the chart below highlights the performance gap between small and large companies. Not surprisingly, the difference also shows up in valuations. The S&P 500 is trading at nearly a 50% premium to earnings vs. our custom-tailored small cap accounts.
 

Heartland Advisors Value Investing 100 Base Value Chart

Source: Bloomberg L.P., Russell® , and Standard & Poors, 9/2/2014 to 8/30/2019
Past performance does not guarantee future results.

Who knows, if Burry’s latest call plays out as well as his last one, maybe they’ll make a sequel to the movie The Big Short, which made him a household name. They can call it The Small Long.  In the meantime, we’ll be here crafting portfolios for those looking to capitalize on the opportunity in small caps.
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Author

Heartland Advisors Value Investing Portfolio Manager Bill Nasgovitz

Bill Nasgovitz

Nasgovitz is Chairman and Portfolio Manager of the Value Fund and its corresponding separately managed account strategy. He also is President and Director of Heartland Funds. He has 51 years of industry experience, 36 at Heartland.

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Past performance does not guarantee future results.

Investing involves risk, including the potential loss of principal.

There is no guarantee that a particular investment strategy will be successful.

Value investments are subject to the risk that their intrinsic value may not be recognized by the broad market.

The statements and opinions expressed in the articles or appearances are those of the presenter. Any discussion of investments and investment strategies represents the presenters' views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true.

Small-cap and large-cap investment strategies each have their own unique risks and potential for rewards and may not be suitable for all investors. Small-cap investment strategies emphasize the significant growth potential of small companies, however, small-cap securities, are generally more volatile and less liquid than those of larger companies. Large-cap investment strategies emphasize the stability of large companies, however, large-cap securities are more susceptible to momentum investments and may quickly become overpriced or suffer losses.

Economic predictions are based on estimates and are subject to change.

Heartland’s investing glossary provides definitions for several terms used on this page.

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