The Dow closed Friday at yet another record high, paving the way for the local exchange to also head higher today, the S&P/ASX 200 Index gaining 23 points in lunchtime trade.
Many are calling this the most hated bull market in history.
Sure, valuations are stretched, but interest rates have rarely been this low, economic growth is solid and earnings growth is decent. Add in relatively low and falling unemployment, and all the building blocks are in place for the stock market to continue to thrive.
Of course, not all stocks are created equal. I'm on record as saying I don't see much upside here for our big four banks, our big miners, our big supermarkets and our big telco, namely Telstra Corporation Ltd (ASX: TLS).
You'll just have to do a little more digging to find tomorrow's winners…
Motley Fool CEO and co-founder Tom Gardner is currently touring Asia. In a recent interview for Singapore's Straits Times, Tom pointed out that small-cap stocks tend to do better than large companies over long periods, saying…
"That's a very important point to note right now, because larger companies have outperformed small companies in the last five years or so – but the world has changed dramatically and that (trend) should reverse."
Today, WAM Capital Limited (ASX: WAM) chief investment officer Chris Stott had a similar message, saying in an ASX release…
"An estimated $5 billion was removed from the small-cap sector and invested in other asset classes throughout the year, placing downward pressure on the share prices of the small-to-medium sized listed companies. We believe this adjustment has ended and that the headwinds facing the small-cap sector have abated.
Company valuations are more attractive compared to twelve months ago and we are confident in our ability to continue to identify undervalued growth companies."
Stating the obvious, you are not going to find "undervalued growth companies" amongst the largest and most widely held ASX companies.
In fact, you'd be struggling just to find a decent level of growth in many of the ASX 20 stocks.
For example…
A number of analysts are expecting Telstra could cut its dividend, something I said was a distinct possibility back in February this year.
Commonwealth Bank of Australia (ASX: CBA) is expected to grow its earnings by just 5% this year, and less than 2% next year. With the CBA share price already trading on a premium valuation, it's hard to see the stock going anywhere fast in the next 12-18 months.
Analysts expect Woolworths Limited (ASX: WOW) to report a 46% drop in earnings for the year just ended, followed by growth of just 10%. And like CBA, Woolworths shares are hardly cheap, trading around 20 time forecast earnings.
You get the drift…
By contrast, WAM Capital's biggest winners over the past year have been Credit Corp Group Limited (ASX: CCP), Afterpay Touch Group (ASX: APT), Nick Scali Limited (ASX: NCK), Pinnacle Investment Management Group Ltd (ASX: PNI) and Imdex Limited (ASX: IMD).
Not exactly household names, and likely not names you'd see in the typical portfolio of a SMSF.
Credit Corp is expected to grow its earnings by 16% both this year and next. Nick Scali has issued a series of profit upgrades. Pinnacle Investment Management's funds under management have jumped 34% higher in the last 12 months. The Imdex share price has jumped by over 80% in the last 12 months.
All are small caps stocks, all growing quickly, all trading at reasonable valuations.
When it comes to stock market investing, nothing's ever guaranteed, especially over the short-term.
But when you widen your lens out to three and five years, and even further, and you include smaller, growing stocks in your diversified portfolio, you can certainly put the odds in your favour.
This bull market is hated most by people who've missed out on the action.
Coming out of the GFC, they sat on too much cash for too long, missing out on some of the huge gains on offer. And today they're afraid to buy in lest they do so right at the top of the market, before it all comes crashing back down again, as the myriad of doomsters will have you believe.
Holding cash makes you sleep well at night. And yes, we're probably overdue some sort of typical stock market correction, one that might take the S&P/ASX 200 Index down 10% or so. They come around, on average, once every year.
But know that cash will be a loser for you year after year as inflation eats it away. Lose a little, lose a little more, lose a little more after that.
And if you're yearning for the days when term deposits might again pay you a decent amount of interest, I have bad news. Because of our ridiculously high house prices, I'm expecting the RBA to keep interest rates in a band of between 1% and 3% for the foreseeable future.
The RBA meet tomorrow. Interest rates will stay on hold at just 1.5% House prices are through the roof. Term deposit rates are through the floor. By comparison, growing stocks paying growing franked and fully franked dividends, are a compelling long-term investment opportunity.
