Small-Cap Stocks to Stay in the Wake of the Big Boys, LPL Says

The woes of small-cap stocks continue, with no end in sight. That’s the conclusion of LPL Financial’s chief investment strategist, John Lynch.

This has been the day of the large capitalization stock, with monsters like Facebook and Apple tearing up the track. The Russell 2000, which tracks small stocks, has lagged significantly the large-cap index, the S&P 5000. Sure, the small fry stocks have done better lately, but not as well as their big brothers.

As Lynch wrote in a research note, “the Russell 2000 has struggled to notch its first record high since August 2018.” The S&P 500 has garnered 42 record highs since then.

Currency fluctuations could hurt the small names ahead, Lynch said. Usually, small caps benefit from a rising US dollar, because they get most of their revenue domestically. Then, the large caps, often with significant overseas operations, find their foreign-earned income diminishes when brought home, Lynch emphasized.

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Now, there are indications that this headwind for large caps may be going away. Lynch said the dollar shows signs of weakening, which would whittle away this small-cap advantage.

“Small caps may eventually reach that coveted record-high status, but we think it’s unlikely they’ll pull ahead meaningfully this year,” the LPL strategist wrote.

Indeed, the performance gap between the two types of stocks has widened. Over 10 years, the S&P index has posted a 14% average total return (price performance plus dividends) versus the Russell benchmark’s 12.1%. But during the recent five-year span, the S&P clocked a 12% gain, with the Russell mustering just 8.2%.

In 2018, the worst year for stocks in the past decade, the large-cap index slid only 4.5%. The Russell dropped almost three times as much, losing 11.1%. And this year, the small-cap index is down 1%, and the large-cap one is up 1.5%.

On Jan. 16, the small-cap barometer came within 2% of exceeding its all-time high, reached in mid-2018 (this happened before stocks tumbled in that year’s nasty fourth quarter). Then, amid market jitters over the coronavirus, small caps fell back.

As Lynch put it: “Stock markets around the world have hit new record highs this year, but US small-cap stocks have yet to join the party.”

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Tags: John Lynch, Large Cap Stocks, LPL Financial, market capitalization, Russell 2000, S&P 500, small cap company, Small Cap Stocks, Stock

Two men were sentenced to more than 11 years and almost six years in prison, respectively, for their roles in a $2.8 million investment fraud scheme targeting the elderly and other vulnerable victims, according to the US Justice Department.

Robert Stencil, 62, of Charlotte, N.C., was sentenced to 135 months in prison and ordered to pay over $2.7 million in restitution and forfeit nearly $900,000. Michael Duke, 51, of Richardson, Tex., was sentenced to 70 months in prison and ordered to pay more than $1.6 million in restitution.

Following a three-week trial in January 2019, Stencil and Duke were each found guilty of one count of conspiracy to commit mail and wire fraud. Stencil was also found guilty of 13 counts of mail fraud, 13 counts of wire fraud and four counts of money laundering. Duke was found guilty of three counts of mail fraud, one count of wire fraud, and one count of money laundering.

Court documents show that from 2012 through most of 2016, Stencil, Duke and their co-conspirators sold millions of dollars of “worthless” stock in a company named Niyato Industries, of which Stencil was the purported CEO and Duke his top salesperson.

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The two allegedly falsely claimed that Niyato had a headquarters in Charlotte, N.C., at least one operational facility, and had sold 2,700 electric vehicles that it had purportedly manufactured. They also claimed the company “possessed patented technology and proprietary hardware,” was an original equipment manufacturer of compressed natural gas (CNG) and liquid petroleum gas (LPG) vehicle, was contracted to establish 5,000 CNG pumps across the US and employed a former executive of Toyota as its COO.

But none of this was true, according to the Justice Department, which said Niyato had no patents, facilities, products, nor plans for an IPO. Its corporate address was a private mailbox in a commercial mail receiving agency in Charlotte.

To entice investors, Stencil, Duke, and their co-conspirators – which included Stencil’s wife – told them Niyato was close to launching an IPO at no less than $5.00 per share, but that they could buy in at $0.50 per share in a pre-public offering. They also said the company would use over 97% of the money it raised selling shares as working capital to grow its business and expand operations. They sold approximately $2.8 million in stock to approximately 140 victims, many of whom were elderly or vulnerable for other reasons.

“Stencil, Duke and their co-conspirators used nearly all of the money raised by selling Niyato stock for their own personal benefit, with Stencil paying salespeople – like Duke – half or nearly half of the money they solicited from each investor on behalf of Niyato,” said the Justice Department in a statement. “Moreover, Stencil used Niyato’s bank account as his own personal piggybank.”

Five other defendants have pleaded guilty in the matter and have already been sentenced, while one other – Daniel Broyles Sr., 62, of Beverly Hills, Calif. – was also charged but remains a fugitive.