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Market-Caps and Stock Selection for Maximum Gains

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When most people think of outperforming stocks, small-cap stocks typically come to mind.

And you would not be wrong to think that way either.

Indeed, if you looked at a list of top-performing stocks, a large percentage would typically be small-caps.

This is because smaller-cap stocks are typically newer companies that are in the early part of their growth cycle, where earnings growth and sales growth (or at least the potential for such) is at their biggest and fastest, percentage-wise. And it's those growth rates that attract large investor interest, and, in turn, the demand that can often send prices soaring.

But there are years when small caps are the worst performers. And instead, mid-caps and large-caps are the clear winners.

Like the seasons, certain types of stocks rotate in and out of favor. And if you concentrate on only one type of stock, it could be to your detriment when that group is no longer the leader.

Sizing Up the Markets

The definition of each market cap classification seems to change every so often as the market changes. For now however, the generally agreed upon definition is as follows:

Small-Cap less than or equal to $1 Billion
Mid-Cap greater than $1 Billion and less than or equal to $5 Billion
Large-Cap greater than $5 Billion

I then put these market-caps to the test by creating three screens: one with market-caps less than $1 billion (small-caps), one with market-caps between $1 billion and $5 billion (mid-caps), and one with market-caps greater than $5 billion (large-caps).

Each screen also consisted of only stocks trading over $3 with an average daily trading volume of over 50,000 shares. I then backtested these screens using a one-week holding period for each of the last nearly thirteen years (2002–YTD 2014).

Note that in the following study, I show the S&P 500 only as a reference to see what the market was doing that year. The screens, however, and the different market-cap group did not exclusively consist of S&P 500 stocks, but rather a universe of over 8,600 stocks in our Zacks database.

Performance Results

Let's start from 2002 and work our way to the present:

• In 2002, it was a lousy market with the S&P down -22.1%. And all capitalizations did poorly as welll with large-caps down -20.3%, mid-caps down -19.4% and small-caps down -20.9%.

2003 was a different story with the S&P up 28.7%. Smalls performed spectacularly with an 84.7% return. Mid-caps were up 47.6%. Large-caps were up 39.2%.

2004 was a decent enough year for the market with the S&P up 10.9%. All the different caps did fine as well and finished up in roughly the same range: small-caps were up 19.8%, mid-caps were up 18.8% and large-caps were up 17.6%.

2005 saw the edge go to the large-caps this time at 13.5%. Mids were up 8.3%. And smalls were up 4.3%, just under the market, which came in at 4.9%.

• In 2006, large-caps were the winner again, albeit by a slim margin. Large-caps were up 20.3%. Small-caps advanced by 18.7% and mid-caps increased by 17.4%. The S&P was up 15.8%.

• And then again, in 2007, large-caps came in first at 11.0%. Mid-caps were up 2.9%. Small-caps actually showed a loss of -4.9%. Both mids and smalls underperformed the market, which came in at 5.5%. And yes, it was surprising to see small-caps actually close down for the year.

• As you know, 2008 was a total disaster all the way around. The S&P was down -37.0%. Large-caps dropped -40.1%. Small-caps were down -38.8%. Mid-caps were down -37.1%. There was no place to hide.

2009, however, saw all caps snap back. The S&P was up 26.5%. Small-caps were up 52.4%. Mid-caps were up 41.3%. And large-caps were up 35.2%. Even though small-caps were the clear winner, I doubt anybody would have been upset with a 41% performance in mid-caps and a 35% gain in large-caps.

• Small-caps led the way again in 2010, but by a much smaller margin. Small-caps were up 28.1%. Mid-caps were up 26.4%. Large-caps were up 19.1%. But they all beat the S&P, which was up 15.1%.

• But 2011 saw small-caps drop to last place with a loss of -14.1%, even though the S&P was up 2.1%. Mid-caps performed the best with a loss of 'only' -4.0%, while the large-caps weren't far behind with a loss of -5.4%. It was a very strange year to say the least with every market-class underperforming, although some far worse than others.

2012 saw the mid-caps in first place again with 13.9%. The difference between all of the sizes was the closest yet with the large-caps in second with 13.8%, and the small-caps rounding out the list with 12.9%. Interestingly, each style underperformed the S&P yet again, which came in at 16.0%.

2013 was a banner year for the market and all the market-caps performed well. But the small-caps led the pack with an impressive 44.2% return. The mid-caps outperformed the market as well with 37.1%. The large-caps came in just under the S&P, but it was still a fine performance at 29.5%.

• So far, in 2014 (YTD thru 8/22/14), the small-caps are significantly underperforming with just 0.9% while the market is up 9.54% (on a total return basis). Mid-caps are up 5.4%, while large-caps are by far doing the best at 8.1%.

Below is a table showing how each of the market-cap groups did over the last thirteen years, highlighting which group was the top performer in each year.

Over the last thirteen years, small-caps showed an average annual return of 14.4%. Mid-caps gained 12.2%. And large-caps were up 10.9%. But there were some interesting differences in several of those years, and some quite sizeable as the groups rotated in and out of the top spot.

While the most significant outperformance was seen by small-caps; the mid-caps and large-caps also performed well, oftentimes with less volatility or drawdowns.

So what do all of these statistics mean, knowing that some market-caps are better than others in different years? It means that you should have a mix of everything in your portfolio.

Here are 6 stocks; two from each market-cap class. And they all have a Zacks #1 Rank:

(LABL - Free Report) Multi-Color (Small-Cap)
(SIMO - Free Report) Silicon Motion Technology (Small-Cap)

(ICLR - Free Report) ICON plc. (Mid-Cap)
(AKRX - Free Report) Akorn, Inc. (Mid-Cap)

(SEE - Free Report) Sealed Air Corp. (Large-Cap)
(ODFL - Free Report) Old Dominion Freight Line (Large-Cap)

By having exposure in all the market-caps, which also means more diversified exposure to all of the different trading styles that are favored by each class, i.e., Aggressive Growth (small-caps), Momentum (small-caps and mid-caps) , Value (mid-caps and large-caps), Growth & Income (large-caps); you can make sure you'll participate in the winningest group, no matter what the market is doing.

Get the rest of the stocks on this list. And put your own ideas to the test. You can do it all with the Research Wizard. Find out how to pick the right stocks right now by taking a free trial to the Research Wizard stock picking and backtesting program.

Sign up for a free trial to the Research Wizard today.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at:

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