Over the next ten years, Mark Cooper of MAC Alpha Capital Management predicts that small-cap value equities in developed markets will do significantly better than the S&P 500.
Usually, a bull market is at or close to a record high. In addition to highlighting potential entry points, relative values can give investors more insightful alerts about whether a market is overvalued.
Mark Cooper, the chief investment officer of Tampa, Florida-based MAC Alpha Capital Management, advises investors to avoid buying stocks that are expensive in comparison to their revenue. Additionally, he believes that small-cap overseas value equities have a chance to significantly outperform the S&P 500 SPX during the next ten years.
Warning about valuation
For large-cap firms, investors usually concentrate on prospective price-to-earnings estimates. These are current prices for rolling 12-month periods split by consensus estimates of earnings per share.
However, a forward P/E ratio is only possible if a company is anticipated to turn a profit. The Russell 2000 RUT, which contains hundreds of unprofitable companies, is the most often referenced and benchmarked small-cap index.
Price to sales is another helpful valuation tool. If we use it on a trailing 12-month basis, we can concentrate on actual outcomes rather than predictions, which are unavailable for many small-cap companies.
According to data provided by FactSet, the S&P 500 is currently trading at a trailing price/sales ratio of 3.21, which is near its record high of 3.26 established in August 2021. Additionally, over the last 20 years, the large-cap U.S. benchmark’s average trailing price/sales ratio has been 1.92, and over the last 10 years, its average valuation has been 2.42. Accordingly, the S&P 500 is trading at a 35% premium to its 10-year valuation and a 67% premium to its average valuation over the previous 20 years.
Due to its market capitalization weighting, the S&P 500 is extremely concentrated. Nvidia Corp. (NVDA), Microsoft Corp. (MSFT), and Apple Inc. (AAPL) make up 20.9% of the top three holdings of the SPDR S&P 500 ETF Trust SPY, which replicates the index by holding all 500 firms. Five equities make up 27.8% of the portfolio concentration when Amazon.com Inc. (AMZN) and Meta Platforms Inc. (META) are included.
On a trailing price/sales metric, Amazon is the least expensive of these five stocks, trading just little higher than the S&P 500’s valuation of 3.21. Compared to their 10-year average valuations, three of the five companies are trading at high-double-digit premiums.
As the dot-com bubble was poised to collapse in March 2000, there were around 400 U.S. stocks trading at prices of at least 10 times revenues; Cooper claimed this was a sign of “speculative froth in the market” in an interview with MarketWatch.
According to him, “the difference is today there are only half as many public companies” in the United States.
FactSet data indicates that Palantir Technologies Inc. (PLTR), which trades at a trailing price/sales ratio of 98.5, is the most expensive stock in the S&P 500 by this metric. As of Wednesday, the stock has more than doubled for 2025.
Strategy Inc. (MSTR), formerly known as MicroStrategy, is another stock that is trading at a high valuation. Its trailing price/sales ratio is 219.1. In recent years, the company changed its business plan to concentrate on storing bitcoin (BTCUSD). As of June 30, Strategy’s bitcoin holdings, which made up the majority of its $64.8 billion total assets, were valued at $64.4 billion. The business was priced at a 44% premium to its assets and a 45% premium to its June 30 bitcoin holdings, as seen by the stock’s closing market capitalization of $93.6 billion on Wednesday. Between the end of June and Wednesday, the stock dropped 18%.
Cooper turned to small-cap equities, stating that a “basket” of businesses with a price/sales ratio of 10 or above “tends to be a fertile ground for underperformance.”
He continued: “Potentially in a more rational world where capital is more expensive, it will be difficult for these businesses.”
In order to find short-selling possibilities, he usually searches the U.S. small-cap market.
“Our data makes it evident that a larger fraction of traders are trading at higher valuations and possess a significant amount of leverage. The people we select to short typically have other problems and don’t earn any money,” Cooper stated.
The chance
Cooper suggested exposure to small-cap value companies in developed markets outside of the United States after presenting three arguments.
First, compared to the S&P 500, foreign companies in developed economies outside of the United States, as represented by the MSCI EAFE Index XX:990300, are cheap. This 20-year graph illustrates that price relationship:
Cooper calculated that the MSCI EAE Index would “have to grow 27% more than the S&P 500 for five years just to get back to the 55-year average” in terms of relative valuation using data spanning a 55-year period through June 30.
“Historical mean reversions have typically been faster than five years and [have] overshot the mean,” he stated.
Second, compared to growth companies, value equities are inexpensive. Here, we’re displaying the MSCI AC World Value Index’s price in relation to the MSCI AC World Growth Index:
Cooper concluded by stating that investors were underweight small-cap stocks, with an allocation of 4% in the US market as opposed to an average of 7.5%. He added that the trend had already begun and that a return to that mean would indicate a notable outperformance for tiny caps in comparison to large caps.
Since small-cap international value stocks have been trading at their lowest price in comparison to the U.S. stock market “for at least 50 years,” he said, the three trends taken together suggest that these stocks represent a long-term opportunity for investors.
Three strategies for small-cap foreign value equities
Cooper oversees hedge fund strategies at MAC Alpha Capital Management, which include both long and short equity positions.
The following three exchange-traded funds are listed by FactSet as direct competitors in the small-cap value stock market for investors seeking low-cost broad approaches outside of the United States:
— The actively managed assets of the Avantis International Small Cap Value ETF AVDV are $11.6 billion. The portfolio has 1,436 small-cap stocks from developed markets outside of the United States. According to Avantis Investors, the fund managers use a value-scoring approach to determine whether companies are “trading at low valuations with higher profitability ratios,” and they change the holdings based on market size. The fund was created in September 2019 and spends 0.36% of the assets it manages each year. That implies that for a $10,000 investment, the costs would come to $36 annually. Morningstar’s U.S. Fund Foreign Small/Mid Value category gives this fund a four-star rating (out of five).
— Out of the three funds covered here, the $3.4 billion Dimensional International Small Cap Value ETF DISV has performed the best over the last three years. It owns 1,478 equities and is also actively managed. The fund, which was created in March 2022, has a 0.42% cost ratio. Morningstar has given it a four-star rating as well.
— 502 equities are held by the iShares International Developed Small Cap Value Factor ETF (ISVL), which monitors an index that looks for cheap valuations in developed markets outside of the US and South Korea. It also applies filters for liquidity, price volatility, and debt-to-asset ratios. With an expense ratio of 0.30%, Morningstar has given the fund a three-star rating. The ISVL was founded in March 2021. Its assets under management total $48 million.
Through Wednesday, all three ETFs have outperformed the SPDR S&P 500 ETF Trust, the MSCI EAFE Small Cap Value Index, and the entire MSCI EAFE Small Cap Index during the previous three years:
