LIR Masthead

Small Cap Comeback: A Big Opportunity for Wall Street's Smallest Stocks

While mega-cap stocks have been some of the best-performing stocks of the year, small caps have essentially been left in the dust.

This underperformance doesn’t necessarily mean that the underlying businesses are struggling. In fact, the opposite is true right now.

These small companies are growing profits, paying dividends and successfully navigating the ever-changing economic landscape.

But misguided investor sentiment has weighed on small-cap stock prices. For one thing, many people see the larger companies as inherently safer plays.

As these popular stocks notch new highs, momentum-chasing algorithms and fear of missing out have amplified this herd mentality.

But as we've seen throughout history, mega-caps eventually fall out of favor when investors realize that these stocks are overbought.

Then the market rotates in favor of other opportunities that are overlooked and undervalued.

We’re seeing this rotation happen again.

The Russell 2000 Index, an ETF that tracks small caps, is breaking out from a range-bound pattern. And it still has a long way to go before it's caught up to the rest of the market.

russell-2000-index-conciergeThe fundamental disconnect between small-cap stock prices and robust business performance has opened up a rare opportunity.

You now have the chance to buy rapidly growing and profitable companies at a huge discount, simply because other investors are still focused on the mega-caps.

In other words, investing in small-cap stocks today means you’re buying more corporate profits for the same dollar amount.

You’ll want to act quickly before the performance gap closes and the rest of the market catches on to this clear opportunity.

Sure, you could buy shares of the Russell 2000 Index to profit from this rotation. But I’d rather focus on the best individual stocks that should outperform the average small cap.

So without further ado, allow me to introduce you to this month’s addition to the Lifetime Income Report portfolio…

A Small Company Backed by Deep Pockets

Cohen & Steers Inc. (CNS) is a global investment firm specializing in real estate and real asset strategies.

While the name may not ring a bell, this small firm has been compounding shareholder wealth for decades, earning its place as one of the industry’s premier money managers.

At its core, Cohen & Steers does one thing exceptionally well: invest in income-generating real estate securities like Real Estate Investment Trusts (REITs), real estate operating companies and preferred stocks.

aum-lir-conciergeWith $80 billion in assets under management (AUM) across mutual funds, closed-end funds and institutional accounts, the firm is an established leader in this niche corner of the market.

Cohen & Steers has built an outstanding long-term track record by adhering to a rigorous research process and active management strategy.

The company utilizes proprietary models to identify mispriced real estate securities globally across the capital structure.

Their expertise allows them to capitalize on temporary sentiment-driven overreactions that are characteristic of this sector.

This focus on fundamentals has paid off in a big way, with Cohen & Steers' products consistently ranking at the top of their categories for performance.

Concerns over higher interest rates, a slowing housing market and increased industry competition have spooked some investors. But I believe these fears are overblown.

Real estate securities still hold up amid high interest rates due to their income component. Growth may slow some, but long-term demand for housing and other properties remains intact.

As for the competition, Cohen & Steers' specialized strategy and established brand give it key advantages over passive funds.

Not only that, but its institutional client base also tends to be stickier than the fickle retail crowd.

Simply put, the market has become too pessimistic about the company's prospects and attractive valuation.

With a fortress-like balance sheet and consistent profitability, this small cap has significant upside ahead as sentiment improves.

Even better for shareholders, the company maintains a shareholder-friendly capital return program.

The company regularly buys back stock and pays a growing dividend that now yields 3.12% annually. Payouts have also increased for well over a decade.

And despite its quality business model and consistent execution, the stock trades for just 22 times next year’s expected earnings, a steep bargain compared to the mega-cap stocks.

Now here’s why I’m especially excited about this particular company over the many other small-cap stocks.

The Odds Are Skewed in Your Favor

Companies in the investment management business like Cohen & Steers provide what's known as asymmetric returns.

That simply means they offer potential for outsized gains when times are good, but downside protection when conditions are more difficult.

As an income investor, these are exactly the types of set-ups you want to focus on.

Asymmetric returns allow you to grow your wealth substantially during prosperous periods while protecting your capital during periodic downturns.

It's a powerful combination for compounding returns over long stretches. Take Blackstone Inc. (BX), another investment management firm, as an example.

Since adding it to our portfolio in 2014, the stock has handed us a remarkable 340% total return as its asset portfolio has appreciated.

The investment management industry is highly lucrative precisely because of this asymmetric return profile.

When a firm's assets under management rise in value, they can charge higher fees. This fee revenue streams directly to the bottom line as operating leverage kicks in.

But here's the key: even when the investments these companies manage are declining or flat, they still generate fee income from their established AUM base.

For the asset managers' customers, this fee model can be a negative when performance is lagging.

But for us as shareholders, it acts as a hedge against the downside while allowing us to capitalize on surging earnings growth during bull markets.

Cohen & Steers’ $80 billion in AUM generates a steady stream of lucrative fees, no matter which way property markets move short-term.

More importantly, when real estate activity picks up, the company is positioned for a surge in performance fees and asset inflows that could send its earnings into overdrive.

So not only should the company benefit as the market rotates in favor of small-cap stocks as a group…

But it also offers the stability of the lucrative asset management industry, making it an ideal candidate for an income portfolio.

Action to take: Buy Cohen & Steers Inc. (CNS) up to $85.

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