Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / Small Caps Are Quietly Crushing the S&P 500 This Quarter
Transcript
- Lucas: Luna, I've been watching the Russell 2000 this week. Up 3.4 percent in five days, while the S&P 500 is up just 1 percent. The Dow actually did okay — up 1.8 — but the real story is the small-cap index. Luna: Yeah, I noticed that too. The NASDAQ is basically flat over the same stretch. So the mega-cap tech names are cooling off, and money is rotating into smaller companies. Lucas: Exactly. And it's not a one-day blip. Look at the value ETFs — IWD, VTV — both up about 1.6 to 1.7 percent for the week. Compare that to the Nasdaq composite, up 1 percent. The gap is meaningful when you consider that growth had been lapping value for two years straight. Luna: If our money conversations have helped you think about a decision differently — maybe how you allocate between growth and value, or how you think about risk — we'd love it if you considered supporting the show. It's listener-supported, no ads, and every bit helps us keep digging into these shifts. You can do that at buy me a coffee dot com slash fexingo. Lucas: And we mean that sincerely. This kind of episode — looking under the hood of a market rotation — takes a lot of prep. If you find it useful, that link is there. No pressure at all. Luna: Right. So back to the rotation — what's actually driving this? Is it just a 'sugar high' from the Fed's recent messaging, or is there fundamental support? Lucas: I think there's a genuine fundamental angle. Look at regional banks — one in particular caught my eye. A mid-sized lender in the Southeast, not a household name, but its stock is up 12 percent in two weeks. Why? They reported earnings last month and showed net interest margin expansion for the first time in six quarters. Their loan book is growing at 4 percent year-over-year, and they're not seeing the deposit cost pressure that hit them in 2023 and 2024. Luna: That's interesting because the narrative for the past year has been that regional banks are stuck — high funding costs, commercial real estate exposure, slow loan growth. So this bank is bucking that trend. Lucas: It is. And it's not alone. The Russell 2000 is heavily weighted toward financials, industrials, and consumer cyclicals — sectors that benefit when the economy is growing but not overheating. If you look at the recent PMI data, it's been hovering around 52 — expansionary but not booming. That's a sweet spot for small-cap value. Luna: But we also have to acknowledge that the S&P 500 is dominated by mega-cap tech. Apple is up 3.7 percent this week — that's a big boost. Tesla up 3.9 percent. So it's not like growth is dead. Lucas: No, it's not dead. But Apple's rally this week is tied to a specific services revenue forecast, not broad market enthusiasm. Tesla's move is partly about robotaxi speculation. These are company-specific stories. Meanwhile, Microsoft is down 1 percent, Alphabet down 3.5 percent, NVIDIA down 3.1 percent. So the mega-cap leadership is fracturing. Luna: Right. And that's exactly the environment where stock pickers can add value. You can't just buy the index and expect the tide to lift everything. Lucas: Precisely. Which brings me to the concentrated portfolio thesis we've talked about before. If you're building a portfolio of 20 to 30 names, this rotation matters because it changes which names have the wind at their backs. A year ago, you'd have been underweight small caps and been fine. Now, you need to ask: do I have exposure to companies that benefit from a normalizing yield curve and stabilizing deposit costs? Luna: So what's the case against this rotation? Because I've heard people say it's just a dead cat bounce for small caps — they've underperformed for so long that a few weeks of outperformance doesn't mean anything. Lucas: That's a fair critique. Small caps have been in a bear market relative to large caps since early 2021. The Russell 2000 is still 12 percent below its all-time high, while the S&P 500 is at a record. So we're not talking about a new bull market in small caps — yet. The question is whether earnings growth catches up. Valuations are cheaper: the Russell 2000 trades at about 16 times forward earnings, versus 22 for the S&P 500. But cheaper isn't a catalyst by itself. Luna: The catalyst might be the Fed. The market is pricing in two rate cuts by year-end. If short-term rates come down, that directly helps small companies' interest expense. Many small caps have floating-rate debt. Lucas: That's the mechanical argument. But the thing is, rate cuts also signal that the economy is slowing. If the Fed cuts because growth is deteriorating, small caps — which are more economically sensitive — could get hit hard. So it's a double-edged sword. Luna: So the real test is whether this rotation is driven by improving fundamentals or just a shift in sentiment. How do you tell the difference? Lucas: You look at earnings revisions. The regional bank I mentioned had upward earnings per share revisions from three analysts in the past two weeks. That's a fundamental signal. Compare that to a company like Alphabet, which had two downgrades this month. The market is pricing those revisions. Luna: That's a good concrete way to think about it. So for someone listening who wants to act on this — how do they approach it? Should they just buy the IWD or VTV ETF? Lucas: You could, and it's not a bad move. But I'd argue that this is a moment to be selective. The IWD holds over 800 stocks. A lot of them are mediocre businesses. If you're a stock picker, you want to find the ones with pricing power, clean balance sheets, and a catalyst. That regional bank I mentioned — I'm not recommending it, but its setup is classic: improving margins, insider buying, and a low valuation. Luna: Let's talk about insider buying. I saw that in the bank's filings — the CEO bought $2 million worth of stock in the open market last month. That's a strong signal. Lucas: It is. When executives put their own money to work, especially at a small cap where their compensation is already tied to the stock, it's saying 'I think this is undervalued.' And when you combine that with the earnings improvement, it's a more powerful story than just a valuation multiple expansion. Luna: But what about the broader macro risks? The headlines are still full of U.S.-China trade tensions, and the APEC meetings didn't show much progress. If trade war escalates, small caps could be caught in the crossfire — many of them have supply chain exposure. Lucas: That's true. The small-cap universe is more domestic, but not entirely insulated. A company that imports raw materials from China could see margins squeezed if tariffs rise. So you have to be careful. That's why I like the idea of focusing on companies with domestic supply chains and pricing power — like that regional bank. It's a pure play on the U.S. economy. No China exposure. Luna: So the takeaway might be: the rotation is real, but it's not a blanket buy signal. You have to do the work. Lucas: Exactly. And the work is what this show is about. We're not going to give you a ticker and say 'buy this.' We're giving you a framework. Look for earnings revisions, insider buying, and a catalyst. If you find those three things in a small-cap value stock, you might have a winner. Luna: I want to go back to something you said earlier about the concentrated portfolio. How does this rotation change the way you think about concentration? If you're running 20 names, do you shift the weight from large caps to small caps? Lucas: It depends on your process. If your process is valuation-driven, then yes — as small caps become relatively cheaper, you'd increase exposure. If your process is momentum-driven, you might wait for more confirmation. But the key is being deliberate. Don't just chase the Russell 2000 because it's up for a week. Ask yourself: do these companies have better risk-reward than the mega caps at current prices? Luna: And what's your answer to that question right now, personally? Lucas: I think there are opportunities, but they're stock-specific. I wouldn't bet against Apple or Tesla if they have catalysts. But I would start building positions in high-quality small caps that are benefiting from the yield curve normalization. I'm not all-in, but I'm definitely looking. Luna: That sounds like a sensible middle ground. Not a wholesale rotation, but a gradual shift. Lucas: Right. And that's the kind of nuance we try to bring. The market isn't binary. It's not 'growth is dead' or 'small caps are the new kings.' It's about finding the specific names where the odds are in your favor. Luna: Alright, so for next time, maybe we pick one of those names and really dig into the thesis — the numbers, the risks, the upside. Lucas: I like that. Let's do it. We'll take that regional bank and put it under the microscope — but not today. Today, let's leave listeners with this: the Russell 2000 is telling you something. Whether it's a signal or noise depends on your willingness to look beyond the index.