Could small-cap stocks fare better on mega-cap tech rally?

While Wall Street waits for tech rallies to broaden out, small-cap stocks could present several opportunities in a less crowded space. Villere & Co. Portfolio Manager Sandy Villere shares his insights on the small-cap market while mentioning some of his favored stocks like Atlas Energy Solutions (AESI) and Pool Corp (POOL).

"They'll [small-cap stocks] catch up despite the fact they've lagged so far in 2024," Villere says. "I just don't think there's a good chance that they outperform during the rest of the year. Maybe large caps stall out mid-way through the year after a very big run-up."

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Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

JOSH LIPTON: Tech stocks leading the way for the S&P this year. But is the trade too crowded for everyday investors? Our next guest says it's time to look into small-cap stocks. Joining us now is Sandy Villere, Villere Company Portfolio Manager. Sandy, it is good to have you on the show. So you say it's time to commit capital to the small-cap, Sandy. Explain why. Why do you want to-- why do you want to be in those pint-sized companies right now?

SANDY VILLERE: Yeah. I mean, you just look back at last year and what a run that the large-cap growth names had, right? Like, up 46% if you look at Vanguard growth or something like that. So I think they've had a good run. And then you look at just valuation, the S&P 500 is trading well in excess of its 20-year average. If the 20-year average is 18.9 times, they're probably up at about 27 times. And you look at small cap, they are only trading at about 16.3 times versus the 20-year average of about 16.7.

So I think they've sort of been left for dead a little bit. And it's time to take a look at some of these smaller names that have the opportunity to outperform, given where large caps have run to.

JULIE HYMAN: Sandy, you're not the only person telling us this. And yet despite the seeming enthusiasm over small caps, they've been falling, right, this year. They've really been-- for the most part. We've had some blips where they've done better. What do you think the disconnect is here thus far?

SANDY VILLERE: What's interesting is small caps do really well coming out of a recession. They do really poorly going into a recession. And they do well coming out of it materially much better than what large caps would do. So it's been kind of a fits and starts as to are we going to have this soft landing, are we going into a recession, you know, where are we.