Small-Caps vs. Large-Caps: The Dilemma Solved

Small Caps vs. Large Caps: The Dilemma Solved image 130813 PC georgeSmall-Caps vs. Large-Caps: The Dilemma SolvedIf you had to choose between buying Intel Corporation (NASDAQ/INTC) and Phoenix New Media Limited (NYSE/FENG), which stock would it be? This is the kind of dilemma we are currently witnessing in stock market trading, as investors look at the risk they want to assume.

In 2013, the preference has been for small-cap growth stocks such as Phoenix New Media over the older and established Intel, which provides a nice dividend, if that is what you want.

The example indicates why there has been a move and shift toward the assumption of greater risk—the opportunity to increase the expected return of your portfolio.

The chart below shows the outperformance of Phoenix New Media in the dark green line versus Intel, which is reflected by the red candlesticks.

Small Caps vs. Large Caps: The Dilemma Solved image intel corpintel corp

Chart courtesy of www.StockCharts.com

Large-cap stocks like Intel are nice, but for the added return, you need to make sure that you have small-cap stocks in your portfolio. To reduce the risk of small-cap stocks, diversification based on company size and industry is required. (For more on the restaurant segment, read “My Top Picks for Restaurant Stocks.”)

At this point, traders appear to be pursuing the risk of small-cap stocks with the hopes of achieving some big gains. This could happen, yet at the same time, with the good generally comes the bad. Small-cap stocks are vulnerable to higher downside risk—especially when the broader market and economy are turning down.

With the current economy showing some stalling, it may be prudent to take some profits off the ledger for some of your bigger winners. For instance, if a stock is up 100% or more, take some profits on at least half of your position, and let the remaining half ride as free money, as you have already made back your initial investment.

If a correction surfaces, and I believe it will, holding small-cap stocks is dangerous due to the heightened probability of more losses during a downturn.

Of course, large- and mid-caps will also tend to turn lower, but not at the same degree as small-cap stocks.

Being a specialist in small-cap stocks and special situations, I constantly look at the macros and, if warranted, will take profits off the table or will sometimes hedge via put options on the Russell 2000 Index to help shelter against some of the downside risk.

The Russell 2000 chart is showing some hesitation, so I would err on the conservative side and take some profits—especially on your non-long-term holdings.

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