PROFIT FROM TINY TECH STOCKS

Big-name leviathans have dominated the market, but the minnows may be catching up.

- RYAN ERMEY

IT’S NO SECRET THAT LARGE TECHNOLOGY firms have led the way for much of the bull market. By now, every investor knows that FANG stands for Facebook, Amazon.com, Netflix and Google (although Google is now Alphabet). From the beginning of the bull market in 2009 through 2018, tech stocks in the large­company Standard & Poor’s 500­ stock index edged out tech stocks in the small­cap S&P SmallCap 600 by a half­percentage point per year, on average. As large­company stocks pummeled small firms across the board in 2019, Big Tech pulled in front big time, returning 50.3%, compared with 39.6% for small­tech firms.

But small tech firms may be poised to close the gap. Jim Paulsen, chief investment strategist at market re­ search firm Leuthold Group, likes to refer to them as “mini FANGs,” and he’s bullish on their prospects. Though small tech firms typically command an 18% valuation premium over large tech names, he says, stocks in the S&P 600 Capped Information Technology index currently sport the same average price­earnings ratio as those in the counterpart S&P 500 infotech index.

That’s even though analysts esti­ mate that over the next three to five years, profits for the small tech stocks will increase at twice the rate of big­ tech earnings, says Paulsen. And although small stocks tend to come with more volatility than large ones, small tech firms will largely avoid some of the risks tied to the tech be­ hemoths. “These firms aren’t in the crosshairs of regulators over privacy or antitrust issues,” he says.

TRY THE SMALL