Short Sellers Walk Away From U.S. Small-Caps After Drop: Options
By Joseph Ciolli
(Bloomberg) — The biggest drop in small-cap equity valuations since 2011 is luring investors back to shares that led the bull market over its first five years.
Price-earnings ratios for the Russell 2000 index have contracted from above 60 to about 43, the largest drop in four years, amid earnings that are poised to climb 10 times faster than the Standard & Poor?s 500 Index over the next 12 months.
With less exposure than larger companies whose earnings are threatened by the strongest dollar in 11 years, the small-cap gauge may be due for a resurgence, according to Donald Selkin of National Securities Corp. Short sellers recently reduced bets against the gauge to the fewest on record.
?Small-cap valuations got ahead of themselves, but they?ve cooled off,? Selkin, the chief market strategist at New York-based National Securities, which oversees $3 billion, said in a phone interview. ?More of their revenue comes domestically, which should boost profits. The market looks like it may swing in favor of the small-caps as the year goes along.?
The price-earnings ratio for the Russell 2000 has slid 30 percent since reaching a four-year high in April. That?s the biggest decline since its valuation slipped 44 percent from June to October 2011.
The small-cap gauge decreased 0.2 percent to 1,236.26 at 10:21 a.m. in New York, while the S&P 500 slid 0.1 percent.
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