logo-loader

Zak Mir on the markets: A rare boom time for small-caps has already begun

Published: 14:43 06 Mar 2017 GMT

snapchat

(This article first ran on March 3)

The highlight of the stock market week last week was once again provided by President Donald Trump as he managed the incredible feat of cheering the market by delaying his fiscal bazooka, at least in terms of the detail. This leaves us with the feeling that anything is still possible, and buying the stock market at dizzy levels – especially in the United States is perfectly fine.

It would appear the appetite for equities is so strong that Snap Inc, the owner of Snapchat, has been able to get away its offering at $17 a share, which values the group at $24bn – roughly 48 times last year’s losses. This is of course the opposite to the conventional way of valuing a company, the price/earnings ratio. Of course, we are talking valuing a brand, an app and a per customer metric.

WATCH: Zak on unicorn booms and dot-com bubbles

For anyone wondering whether the tech area of the stock market is red hot, it clearly is.

But what has really struck me since the start of the year, something which I noted to one of the a small-caps brokers I know and many previously bruised punters in micro caps. In fact, to describe some as bruised might be a case of Great British understatement.

There is a macro reason for this, which is nothing to do with an individual's stock picking prowess. I have been trading the stock market to a greater or lesser degree for just over 30 years.

The start of this time frame was the run up to the 1987 Crash Mrs Thatcher's privatisation spree, when so called “Sids” were attempting to “stag” British Gas shares. It was the “Loads of Money” / “Yuppie” era, one which by definition was blown away by the bust of the late 1980's.

It then took another decade for the late 1990s Dotcom boom to grab hold before that bubble burst, and of course, we are still feeling the after effects of the 2007-8 Global Financial Crisis in the banking sector even today.

So it is evident that for small caps you may have to wait between 10- 20 years for the good times to arrive, and then only have a couple of years at best to make hay while the sun shines.

I would argue that we are going into such a golden period – and this has already started since the phenomenon of the Trump Bump in November. This idea is being helped along by the way that after at least 20 years the real estate market is no longer the one way bet it has appeared. Some of this cash will divert to shares.

My evidence for being the big bull stems from recent news flow in the small caps space which only happens at the hottest periods for the market. For instance, when shares of companies go to an instant and sometimes significant premium to the placing price, like Purplebricks (LON:PURP), and when companies say that know of “no reason for a share price rise – seen at Galantas Gold (LON:GAL) and Frontera Resources (LON:FRR).

The last “green flag” is when companies ,which most small caps traders know not to be of the highest quality see their shares soar. I am obviously not going to name names in this respect, suffice to say that those who have jam tomorrow business models, a blue sky theme, or a hole in the ground (mine) in need of lots of cash, are amongst the most likely suspects.

That said, it is just as well the good times are rolling given the way that most of the time over the past few decades many a cynical trader could have remained short of many a minnow and made money without too much stress.

Indeed, this point relates to how high this particular asset class may stretch in the sense the greatest rallies for stocks or markets come when there is a short squeeze and bears are panicking to cover their positions.

It is clearly what has happened in the wake of the Trump victory, when many from George Soros downwards (he has admitted to losing $1bn on shorting the market due to Trump fears) have come unstuck. If the short covering continues to gather momentum, the records being broken on both sides of the Atlantic may only be the start of a rich harvest period for stock market investors.

Zak Mir is a Presenter at TipTV, Senior Journalist at WhyMedia.com, and columnist at Yahoo! Finance UK

FTSE rises ahead of Easter weekend, JD Sport gains on upbeat outlook -...

The FTSE 100 gained on the final morning of this shortened Easter trading week. Festive cheer was limited though, as Thames Water confirmed shareholders would not provide it with a £500 million rescue package, prompting speculation over the London supplier’s future. On a more positive...

38 minutes ago