With interest rate cuts on the horizon and a potential improvement in market conditions, savvy investors are turning their attention to small-cap and micro-cap stocks. A new study commissioned by advanced aerospace engineering company New Horizon Aircraft HOVR suggests that both institutional and retail investors are likely to significantly increase their allocation to these market segments over the next 12 months.
The study, conducted by PureProfile, surveyed fund managers across the United States, Canada, Europe, the Middle East, and Asia, representing a collective $82.4 billion in assets under management. A significant 76% of the respondents indicated their expectation that institutional investors will increase their exposure to small- and micro-caps within the next six to twelve months. Of these respondents, 34% believe the allocation will increase by 25% or more.
Retail investors are also expected to allocate more capital to micro- and small-caps, with 83% of the survey respondents anticipating this trend. Around half of these respondents suggested that retail investors will boost their investments by over 25%, while 12% believe retail investors could increase their exposure by as much as 50%.
The study also uncovered a perception among some fund managers that current exposure to small- and micro-cap stocks is underweight. Approximately one-third of respondents described institutional investor exposure to these segments as underweight, with 59% expressing this sentiment regarding retail investors. However, the research also found that 27% of respondents consider institutional investor exposure to these stocks as overweight, while 30% hold the same view regarding retail investors.
According to Horizon Aircraft CEO Brandon Robinson, this shift in investment strategy could be driven by the potential for higher growth rates in small-cap companies compared to their larger counterparts. “As the economy rebounds, small and micro-cap companies are likely to have higher growth potential than large-cap companies. This is due to their agility in capitalizing on new technologies alongside investors looking for significantly higher growth potential over the magnificent seven and other ultra-large cap stocks that are showing signs of being overbought,” Robinson notes.
The late-1990s/early 2000s period provides an interesting parallel to today’s market environment, showcasing how small-cap stocks can rebound strongly after a period of underperformance. During the dot-com bubble, large-cap stocks, particularly those tied to the internet boom, significantly outpaced small caps. These tech giants, much like Nvidia NVDA today, saw their valuations skyrocket, creating a significant valuation gap between large and small-cap stocks.
However, in the years after the dot-com bubble burst, small caps began to outperform large caps as the market recovered. Those who invested in stocks in the S&P 500’s Information Technology index in 2000 lost 29% cumulatively over the next five years. In contrast, those who continued to invest in small-cap value gained 89%, based on the Russell 2000 Value Index from the start of 2001 through 2005.
Today, the valuation gap between small and large caps is the widest it has been since the dot-com era. In terms of forward price-to-earnings, small caps are currently trading at 14 times earnings, while large caps are trading at 20 times. This disparity suggests that small caps could potentially be once again poised for a period of outperformance.
One small-cap stock that could benefit from this reallocation of investments is HOVR, the ticker symbol for New Horizon Aircraft. New Horizon Aircraft is aiming to disrupt the advanced air mobility industry with its hybrid electric Vertical Takeoff and Landing (eVTOL) aircraft, called the Cavorite X7.
With a projected useful load of 1,500 lbs, an anticipated maximum speed of 250 miles per hour, and a range of 500 miles, the Cavorite X7 is designed for a wide range of applications, including medical evacuation, critical supply delivery, disaster relief, special military missions, and regional air mobility. For investors seeking to stay ahead of the curve, keeping a close eye on New Horizon Aircraft and similar small-cap innovators could be a strategic move.
