What is the "new normal" anyway? Does it simply mean that former swashbuckling financiers like Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) will throttle back their risk-taking? Does it mean that consumers won't be rushing out to buy Coach (NYSE:COH) purses by the armful or fill up their SUVs with electronics from Best Buy (NYSE:BBY)?
Bill Gross, manager of PIMCO's massive Total Return bond fund, has focused on the forces of delevering, deglobalization, and reregulation as drivers of a new state of affairs for American business and investing. He's concluded that all of this will add up to a period of slower economic growth, a reliance on government intervention, and a vulnerable dollar.
Robert McNamee, who wrote The New Normal: Great Opportunities in a Time of Great Risk, quips on his website:
Wake up and smell the coffee. This is not your father's economy. And it's not the boom that inflated our expectations and then exploded. But it's also not the doom and gloom we've been mired in for nearly three years now! So, wake up.
In short, no matter whose theory you subscribe to, the idea is that things, they are a-changin'. But what does this all mean for investing in the wild and wooly world of small-cap stocks? To answer that question, I turned to the folks over at Motley Fool Hidden Gems.
Stan Huber, senior analyst:
New normal or not, the general case for dedicating a portion of one's portfolio to small-cap stocks doesn't change. These companies are underfollowed by Wall Street and the opportunities to find mispricing in the market are superior. Also, many small caps have very straightforward businesses that can be simply modeled and easily tracked, reducing the possibility of unwelcome surprises.
Take Buffalo Wild Wings (NASDAQ:BWLD), for instance. With chicken wings and sports as the cornerstone of the restaurant chain, it doesn't take an MBA student to understand this business. And this spicy wing-slinger really knows how to grow -- it boosted revenue over 230% in the five years ending in 2008. Yet this still isn't a name you'll hear being thrown around much on CNBC.
My conception of the "new normal" is an environment in which credit is tighter and the consumer cuts back on discretionary spending. While I might make some changes in which sectors I focus on and will definitely require balance sheet strength, small caps remain a key allocation component. In my experience, small caps are often market leaders coming out of a recessionary trough because they are fundamentally simpler businesses and can react more rapidly to downsizing and growth when necessary.
Mike Olsen, senior analyst:
This past year, we learned that stocks can do something other than go up -- namely, they can go down. And fast.
OK, but seriously, I don't think that it's particularly worthwhile to paint any class of stocks -- small, large, growth, or value -- with broad strokes. Macroeconomic themes are certainly a relevant consideration, but for those of us that look at stocks from a business perspective they're only as important as the impact they have on a particular business. So are small caps, growth stocks, or value stocks more or less charming one year hence? That's anyone's guess.
There are currently two themes I am focused on: Quality and conspicuous consumption. There's no question that the consumer has had the rug pulled out from under him. As of now we probably haven't seen the full extent of this, but we know it's going to continue to have a major impact. As a result, when it comes to many a consumer, industrial, or other consumption-oriented stock, my focus is on finding high-quality businesses, attractive valuations, and properly sizing my positions.
Don't get me wrong, I'm not betting against Target's (NYSE:TGT) survival. I'm just not sure whether some of the consumption of the past is going to come rushing back.
Seth Jayson, Motley Fool Hidden Gems co-advisor:
New normal you say? Nah, the game never actually changed -- though it sure felt like it did. What I mean is that cycles and contractions are normal.
Credit has gone from tight, to loose, to tight in the past. It's just that we human animals don't remember the past well. We only remember bits and pieces of it, and it colors our predictions of the future.
One of the mistakes we made at Hidden Gems was not buying small positions in some of our more leveraged companies, like American Reprographics (NYSE:ARP). Sure, there was a risk they'd miss their covenants and have to work something out. But there wasn't much risk at all that the entire business would be compromised, and there were decent odds that they'd get through. And when that happened -- at least in the case of American Reprographics -- there was a quick triple in the stock price. But we, like others, were conditioned to think of the future through the lens of the very painful and scary present, and we missed some opportunities.
Looking ahead, we plan to use the distorted lens that so many investors are looking through to our advantage and capitalize on some of the great overlooked opportunities out there right now.
