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Royce & Associates Principal Jay Kaplan on the factors investors should consider when choosing small-cap stocks.
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Willing to hold your nose through some smelly trends for small caps smaller companies my next guest says.
You will expect a very nice reward.
In five years could you wait that long.
He's here with his favorite small caps -- -- of the belief that buy and hold does not necessarily debt right.
Well it's not necessarily dead it's it's a really good thing in our ideal world we buy -- stock.
Holder for ten years go to sleep wake up and life would be -- the reality -- may be you have to trade a little bit in between but if you buy.
Quality stocks.
Buy and -- works well historically the small caps have and have done so much better than the large caps but.
Lately students -- a year to date that that really hasn't been the case you for the Russell 2000 would react 813 or so.
-- -- eighteen.
Not the 83835.
Level the people had.
Sort of gotten used to seeing that but what you know how do you pick them how do you pick the names that you feel will get a nice return eventually.
You know for us it's about quality and -- and one of the ways we measure that we look for companies with high returns on capital great free cash flow.
Companies that have really good dividends we look for really strong balance sheets good business models good management teams.
And you have to -- and at the right price -- buy and when they're out of favor and five years later this.
So let's put -- -- four step plan that you just outlined because articulating that helps people figure out what to do when you will be naming the ones that you see fit into these parameters but.
-- -- What's atmosphere -- what you feel for the atmosphere out there right now.
Well you know equities.
But the Fed wants people to buy equities so I think that's probably healthy for the equity market if you look out over the long term.
With interest rates -- -- the economy getting better or not great -- -- getting better unemployment ticking down a little bit some signs of life and housing.
All of those things portend pretty well for the small cap stock market I think everybody was saying -- over the past ten years of course when with when the financial crisis hit you were pretty much breakeven -- you invested ten years ago.
Spin it for over ten years will that disappointment be here again.
Well you know I think the way we look at -- we think over ten years you can earn a high single digit kind of return over time.
And on a risk adjusted -- if you look at it the way we do when trying to take the risk down that's probably not a bad return.
Equities folks over these years.
Over time have pinned the better deal in fact on average since 19291930.
They've returned anywhere from nine to 11%.
Of course some years -- -- some -- some way way better here's your value fund -- -- dividend value.
What your highest yielding stock in this fund his wife.
-- I don't know we have some socks on the stock to talk about today yields about 3% for example so you don't need to go for the seven to 10% -- know you know and we don't do that I mean most of those -- -- -- -- master limited partnerships all of which are heavily leveraged and we don't do a lot of leverage for their companies that are broken and we don't believe you brokerage.
