Micro-Cap Stocks Offer a Contrarian Playground as Passive Indexing Starves the Broader Market of Liquidity

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An exceptionally tight circle of mega-cap stocks dominates benchmark averages, with passive indexing funnelling trillions into the top of the S&P 500 and starving the broader equity landscape of liquidity. Rob Isbitts highlights the micro-cap space as a contrarian opportunity, noting the First Trust Dow Jones Select MicroCap Index Fund (FDM) has just $250 million in assets under management compared to the Vanguard S&P 500 ETF (VOO) which is about 3,700 times larger. FDM focuses on the lowest market-cap deciles, filtering for value and liquidity metrics, and trades at under 13 times trailing earnings. Isbitts points to specific holdings with attractive charts, including Deluxe (DLX) at less than 7 times trailing earnings, Business First Bancshares (BFST) poised to benefit from lower interest rates, and LSI Industries (LYTS) which just broke out to a new high. He advises equal-weighted position sizes and shorter tactical horizons due to structurally thinner liquidity in micro-caps.

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Deluxe Corporation
DLX
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trades at less than 7 times trailing earnings, attractive valuation

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