Investors Could Increase Exposure To Small- and Micro-Caps Over The Next Year: Research Published By New Horizon Aircraft (NASDAQ: HOVR)
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August 19, 2024 08:35 AM Eastern Daylight Time
By James Blacker, Benzinga
With interest rate cuts expected soon and other market conditions potentially set to improve, savvy investors are turning their attention to small-cap and micro-cap stocks, a new study suggests. According to the research, which was commissioned by advanced aerospace engineering company New Horizon Aircraft (NASDAQ: HOVR), both institutional and retail investors might significantly boost their allocation to these market segments over the next 12 months.
Growing Appeal Of Small- And Micro-Cap Stocks
The study, carried out by PureProfile, surveyed fund managers in the United States, Canada, Europe, the Middle East and Asia with a collective $82.4 billion in assets under management. A notable 76% of the respondents said they anticipate that institutional investors will increase their exposure to small- and micro-caps over the next six to 12 months. Of this number, 34% think the allocations will increase by 25% or more.
Furthermore, retail investors are also expected to allocate more to micro- and small-caps, with 83% of the study’s respondents saying this will be the case. Around half said retail investors will boost their investments by more than 25%, while 12% think retail investors could increase their exposure by as much as 50%.
The study also found there to be a perception among some fund managers that current exposure to small- and micro-cap stocks is underweight. Approximately one-third of respondents described institutional investor exposure to these segments as underweight, while 59% expressed this sentiment regarding retail investors.
However, the research also found that 27% of respondents consider institutional investor exposure to these stocks as overweight, while 30% think the same for retail investors.
According to Horizon Aircraft CEO Brandon Robinson, this shift in investment strategy could be driven by the potential for higher growth rates in small-cap companies compared to their larger counterparts.
“As the economy rebounds, small and micro-cap companies are likely to have higher growth potential than large-cap companies. This is due to their agility in capitalizing on new technologies alongside investors looking for significantly higher growth potential over the magnificent seven and other ultra-large cap stocks that are showing signs of being overbought,” Robinson notes.
Lessons From The Dot-Com Bubble
The late-1990s/early 2000s period provides an interesting parallel to today’s market environment, showcasing how small-cap stocks can rebound strongly after a period of underperformance. During the dot-com bubble, large-cap stocks, particularly those tied to the internet boom, significantly outpaced small caps. These tech giants, much like Nvidia (NASDAQ: NVDA) today, saw their valuations skyrocket, creating a significant valuation gap between large and small-cap stocks.
However, in the years after the dot-com bubble burst, small caps began to outperform large caps as the market recovered. Those who invested in stocks in the S&P 500’s Information Technology index in 2000 lost 29% cumulatively over the next five years. In contrast, those who continued to invest in small-cap value gained 89%, based on the Russell 2000 Value Index from the start of 2001 through 2005.
Today, the valuation gap between small and large caps is the widest it has been since the dot-com era. In terms of forward price-to-earnings, small caps are currently trading at 14 times earnings, while large caps are trading at 20 times. This disparity suggests that small caps could potentially be once again poised for a period of outperformance.
Horizon Aircraft: A Small-Cap Stock In The Advanced Air Mobility Space
One small-cap stock that could benefit from this reallocation of investments is HOVR. New Horizon Aircraft is promising to shake up the advanced air mobility industry with its hybrid electric Vertical Takeoff and Landing (eVTOL) aircraft, called the Cavorite X7.
With a projected useful load of 1,500 lbs, an anticipated maximum speed of 250 miles per hour and a range of 500 miles, the Cavorite X7 is designed for a wide range of applications ranging from medical evacuation to critical supply delivery, disaster relief, special military missions and regional air mobility.
For those looking to stay ahead of the curve, keeping an eye on New Horizon Aircraft and similar small-cap innovators could be a smart move.
Read more about New Horizon Aircraft:
Featured photo by Sergei Tokmakov on Pixabay.
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