Growth continues to look historically cheap compared to value within both small- and mid-caps by an average premium of 9%, and 22%, respectively, according to a BofA report.
Analyst Jill Carey Hall said that small cap value also looks cheap compared to its own history, trading at a forward P/E of 12x, compared to 13x historically.
“Combined with continued evidence of an accelerating profits cycle, we continue to favor value over growth – where small cap value also has more high quality stocks and fewer non-earners than small cap growth,” Hall said.
Within small caps, energy (PSCE) and financials (PSCF) are the most inexpensive compared to history, trading at a discount to the historical relative multiple.
Small cap technology (PSCT) and industrials (PSCI) are the most expensive compared to history, trading at a premium on all metrics tracked, analysts said.
In addition, relative to their large caps peers, “most of small caps sectors trade at a discount on a majority of metrics we track, except for staples (PSCC) and utilities (PSCU).”
Within mid-caps, energy and financials are the most broadly inexpensive compared to history, and technology, industrials and health care are the most expensive. Also, most mid-cap sectors, aside from staples and materials, are trading at a premium compared to their small-cap peers.
“Multiples in small caps suggest 9% annualized returns over the next 10 years, vs. 2% annualized returns for large caps,” Hall said. “The relative forward P/E multiple of the Russell 2000 (IWM) vs. Russell 1000 (NYSEARCA:IWF) also suggests that small caps could outperform large caps over the next ten years.”
