Even as large, fast-growth companies, paced by tech favorites like Apple and Amazon, have chalked up huge gains over the last decade, the stocks of smaller companies, known more for their solid but plodding value propositions than their breakneck growth, have lagged.

The numbers for the last decade are grim.

The large-company Russell 1000 Growth Index has returned 15.2% a year in the 10 years through Dec. 31 versus 10.6% annually for the small-company Russell 2000 Value Index, reports Dougal Williams, chief investment officer for the asset manager Vista Capital Partners.

But small-cap value has actually outperformed growth over the longer term.

Since Jan. 1, 1979, through Dec. 31, 2019, the Russell 2000 Value Index has returned 12.7% a year, compared with 11.6% for the large growth stocks of the Russell 1000 Growth index, Williams said.

Small-cap value stocks have, in short, had a relatively poor 10 years but a fine long-term record. That implies opportunity for investors, strategists like Lori Calvasina say. She heads U.S. equity strategy at RBC Capital Markets and said she now favors small-cap value stocks.

By definition, value stocks sell at a lower price in relation to basic measurements like earnings or book value. The discounts could reflect problems within an entire industry or doubts about an individual company’s prospects — yet they could mean that many of these stocks are now bargains.


Jill Carey Hall, head of U.S. small- and mid-cap strategy at Bank of America Merrill Lynch, said that “both small caps and values are poised to outperform.” Already, she said, there are “early signs of rotation” into these sectors.

Because value has outperformed growth over very long periods, a comeback could be in the offing, Williams said. “After prolonged underperformance, it is not the time to give up on them.”

Small-cap value companies may be steady earners with solid dividend payouts and strong balance sheets, but they’re often obscure slow-growth companies whose total market value is less than $2 billion.

The contrast with large tech stocks is glaring. Apple’s current market cap of roughly $1.2 trillion is 600 times or more greater than the market capitalization of many Russell 2000 Value companies.

Calvasina said the comparative earnings performance of growth and value stocks has shifted over recent years. A decade ago, for example, 37% of smaller value stocks had negative earnings. This was a bit more than the 33% of small-cap growth stocks that produced earnings losses.

But the data through September, the latest available, show that 27% of the smaller value stocks have negative earnings, while 39% of the smaller growth stocks have losses.


“It’s sending a signal to shift within small caps from growth to value,” Calvasina said.

Growth now trades at an even higher premium to value than is usually the case, Hall said. “Historically, the premium is about 30%,” she said, compared with roughly 50% now.

Steve Lipper, senior investment strategist at Royce Investment Partners, said the slow economic recovery has hurt value stocks. “It’s been a toxic cocktail for value,” he said. “When growth is scarce, it is precious,” Lipper said. “Companies that can grow in a period of slow growth are more valuable.”

Investors who are convinced by these considerations and think a reversal is coming can choose among small-cap value exchange-traded funds that include the iShares Morningstar Small-Cap Value ETF and the Invesco S&P Small-Cap 600 Pure Value ETF.

Another approach is to invest in actively managed funds like Franklin Small-Cap Value. Steven Raineri, the fund’s lead manager, said that in choosing stocks for his portfolio, he assesses corporate management: “Are they working for the shareholders or for themselves?” he asks.

He said he wants executive compensation to be aligned with performance. “I don’t want to invest in companies where the pay is going up every year and the performance is going down,” he said.


Raineri also wants companies with manageable debt. “We’re not thrilled” when management is “excessively leveraging a company to buy back stock,” he said.

One of his fund’s holdings is Gibraltar Industries, which has expanded from the manufacture of items such as mailboxes and gutters to greenhouses and solar installations. Raineri applauds Gibraltar for its “clean balance sheet” and “very low debt.”

Jim Tringas, lead portfolio manager for the actively managed Wells Fargo Special Small-Cap Value fund, said one large holding is Innospec, a maker of specialty chemicals, which has successfully addressed niche markets while generating “a lot of free cash flow.”

“They have no net debt,” Tringas said.

Tringas said he looks for companies “that are not particularly dependent” on the economic environment. That way, he said, “you can make money even if the economy isn’t strong.”