Manager Commentary, 2nd Quarter 2017
2nd QUARTER REVIEW
The second quarter performance for the stock market was very much like the first quarter performance. Large stocks performed well and growth stocks outperformed value stocks. The table below details the performance for large stocks and small stocks for both the second quarter and year-to-date.
Whether it is large stocks or small stocks, technology and healthcare stocks continue to dominate the performance charts. The table below provides the performance results for each sector within the Russell Microcap Index. As you can see, technology and healthcare stocks were the only stocks that produced double digit returns through the first six months of the year. It has been a very poor period for consumer and energy stocks, as they declined significantly during the past six months.
While the equity markets have performed well in the past six months, most of the gains are attributable to multiple expansion. As fundamentalist, we would prefer to see decent revenue and earnings growth along with strong price appreciation. We, and many other strategists, believe earnings growth will improve dramatically in the next year or two. This confidence in future earnings growth makes us believers in this bull market. However, valuations across the marketplace are starting to look rich. The next table below outlines three valuation measures for the large cap Russell 1000 Index and the small stock Russell 2000 Index and the Russell Microcap Index. While not at peak valuations levels, these multiples are lofty relative to anytime in history.
The chart below shows the historic price-to-sales ratio of each index we reviewed above, as well as the historic price- to-sales ratio for our flagship MicroCap Opportunities Fund. As you can see, large cap valuations on this chart have been going straight up for about a year and a half, and are now at peak valuations. The Russell 2000 and the Russell Microcap Indexes are near peak valuation levels too, but remain well below the valuations of the large-cap Russell 1000 Index. While our MicroCap Opportunites Fund has almost always traded at lower valuation levels than that of the market indexes, the Fund is now trading at the widest discount to the indexes in 24 years. This valuation discount gives us confidence in our portfolio of companies versus that of the rest of the market. (The current P/S ratios for the Perritt Ultra Microcap and Low Priced Stock funds are also significantly lower than the market at 1.16 and 1.39 respectively.)