2022 handed out a lot of valuable lessons.
It reminded investors that the trade-off for owning the world’s highest-returning asset class over the long term – a diversified portfolio of stocks – is that you must occasionally endure great volatility in the short term.
It reminded them that the glamour names that everyone is talking about – think Tesla (Nasdaq: TSLA) and Amazon (Nasdaq: AMZN) – aren’t always the best investments.
Most importantly, it reminded them that valuations matter.
The stocks that held up best in 2022 were the ones with low price-to-earnings ratios and big dividends.
And the sector with the greatest values – energy stocks – performed best of all.
While the S&P 500 declined 18% last year, the energy sector rose 55%.
For investors, 2022 is already ancient history, of course. The key now is to focus on what lies ahead.
I’ve made it clear here and elsewhere that I believe small cap stocks – and especially microcaps (the smallest of small stocks) – offer the most upside potential.
Especially now when they’re so undervalued relative to larger companies.
Let’s start by examining their long-term outperformance…
In his newly updated edition of the investment classic Stocks for the Long Run, Dr. Jeremy Siegel at the Wharton School of the University of Pennsylvania reveals that from 1926 to 2021, small caps returned 11.99% annually vs. 10.35% for the S&P 500.
Let me put that 1.64 percentage point difference in perspective…
Ten thousand dollars invested in the S&P 500 in 1926 – with dividends reinvested through 2021 – turned into $115.7 million.
That’s a powerful case for equity ownership.
Yet the same amount invested in small stocks over the same period – a period that included the Great Depression – would have grown to $469.9 million.
Over time, the most successful small companies return a lot more than the most successful large companies.
And that’s particularly true when the valuations are more compelling.
For example, the S&P 500 currently sells for 20 times expected earnings for the next 12 months.
The technology-laden Nasdaq sells for 27 times earnings.
Even after last year’s big drop, those ratios are still well above historical averages – and no great bargain.
Yet I’m finding dozens of small cap and microcap companies that are nimble, growing… and dirt cheap.
Out of respect for paying subscribers, I can’t reveal their names and ticker symbols here.
But let me give you a little taste of the gains we’ve been enjoying in my VIP Trading Service Oxford Microcap Trader…
Earlier this year, I recommended a San Francisco-based digital financial services company that has helped millions of customers meet their investment goals and reach financial independence.
The stock was selling for less than five bucks.
But sales were growing 51% year over year. Adjusted earnings were up 332%.
And the company had easily exceeded Wall Street’s sales and earnings estimates in each of the prior four quarters.
Our shares rose 24% in just two short weeks.
That kind of short-term gain simply isn’t possible in mega-stocks like Walmart (NYSE: WMT) or Coca-Cola (NYSE: KO)… or even with technology leaders like Apple (Nasdaq: AAPL) or Microsoft (Nasdaq: MSFT).
If you want to make good money in 2023, here’s my advice…
Invest most of your equity portfolio in solid, blue chip stocks.
But make sure you also hold some of the fastest-growing small companies with the best valuations. Those are likely to deliver the highest returns of all this year.