O'Shaughnessy's Tiny Titans Screen
There are many proponents of investing based on market capitalization. James O’Shaughnessy is one of those proponents. We introduced four stock screening strategies in 2006 based on his book “Predicting the Markets of Tomorrow: A Contrarian Investment Strategy for the Next Twenty Years” (Portfolio, 2006). The book discusses market-capitalization trends and investment cycles that O’Shaughnessy believes last about 20 years.
The best-performing strategy of the group is called Tiny Titans, which focuses on low-price micro-cap stocks. Much research has been done regarding the success of investing in this market-cap category. AAII’s Shadow Stock Portfolio is based on a study that showed that small and micro-cap stocks tend to outperform the overall market over long periods of time.
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O’Shaughnessy believes the reason for this outperformance is that few analysts follow these small stocks. In addition, many institutional investors and mutual funds cannot trade these stocks without moving the price due to the relatively small number of outstanding shares. This leaves room for surprises, which can lead to a performance “pop.” O’Shaughnessy also says that micro-cap stocks have a low correlation with the overall stock market, making them a potential hedge in a portfolio of larger-cap stocks.
On the flip side, micro-cap stocks can be very volatile and risky. A sudden influx or outflow of money in the stock can cause the price to move dramatically.
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