iShares small-cap value ETF (IJS)

[Nords]

I'm not your typical market timer who thinks he can call the tops. I'm skeptical by training yet I'm optimistic by nature. I think that the economy is gearing up, that the stock market will rise over the next few years, that inflation will remain tame, that interest rates will rise to tame it, and that volatility will settle down a little.

But we might be getting a wee bit ahead of ourselves.

IJS isn't technically a stock-- it's a value index of the S&P600. In March 2009 it hit a low (along with everybody else) of $32.58. Yesterday, on Friday 23 April, it closed at $70.82. It's risen 117% in 13 months, and that doesn't include its dividend yield of 1-2%.

Its collective trailing 12-month revenue is less than zero, so its P/E is negative. However clearly someone expects positive future revenues, and they'd have to be a pretty big honkin' number to keep its forward P/E below 20.

It hit an all-time high of $82.57 in June 2007 and the last time it was above $70 was Sep 2008. Breaking $70 to me seems like an important psychological barrier.

I keep thinking this fund can't possibly get any higher, and I keep being proved wrong, but luckily we have a plan. This asset is perpetually bumping itself up against its upper limit of our allocation. We've sold off a few shares a half-dozen times in the last five months, and it looks like we're not done yet. I don't mind piling up to 10% cash for a few more weeks of "sell in May and go away"...

 

[IndependentlyPoor]

I'm not your typical market timer who thinks he can call the tops. I'm skeptical by training yet I'm optimistic by nature. I think that the economy is gearing up, that the stock market will rise over the next few years, that inflation will remain tame, that interest rates will rise to tame it, and that volatility will settle down a little.

Bookmarked in my "Famous last words" folder.

 

[LOL!]

US small cap value has been on a tear this year with it being up over 20% when US large cap is up just 10% and international is up 5% or so. I do not own IJS, but VBR is my largest single holding.

All one can do is stick to your asset allocation and rebalance according to your rules.

 

[plex]

Small value has certainly had a good run YTD, it has had the highest growth of any asset class. Over the 1-year range, it now is coming close to passing the return of emerging markets/precious metals, though it has a ways to go before reaching REITs. It certainly is highly valued, but that does not mean it will experience a significant correction anytime soon.

Personally, I think the volatile assets that have done very well may correct themselves sometime soon, but it will be less than likely until the 3-year return at least hits the historical average of 9-10%, it is currently only in the 5-6% range for my portfolio (and I hold a significant small value tilt, and I bought right at the start of the recovery...so this is an inflated return to begin with). It could happen before that, it is just less probable, especially with the boom/bust way in which the masses invest.

 

[Nords]

I sold off a couple more percent on Monday, stuffing the total allocation back down toward the middle of its band.

The experience, as usual over the last few months, ticked me right off. It opened higher than Friday, just under $71/share, so I put in a limit order at $71. It blew through that limit (probably once the market-makers realized who was selling) just to let me know that I left a few more bucks on the table.

But it closed below $71 and today it's flopping around $69.

Way back in Feb, when it was trading at $56, I figured it'd run its course. I sold (a very few) covered-call options contracts for Aug at a $60 strike. The strike price was a little closer to the share price than I thought was prudent. But it seemed like a stupidly high price, my spreadsheet indicated that strike price would put it over its rebalancing trigger so I was ready to sell the shares anyway, and I didn't think it'd persist in running up that fast after the previous 11 months... especially not with a couple dividend payments before expiration.

So now some happy call buyer can't believe his bargain. I hope he sells the call to a greater fool before its time & price value decay away. We'll push our cash back up toward a 10% allocation and see what comes next.

 

[nwsteve]

Nords
Others seem to think your strategy is right on the mark The following is frm a recent Bloomberg article.
"The premium investors are paying today to own small- capitalization stocks versus their large counterparts is the biggest in at least 27 years, said James Floyd, senior analyst at Leuthold Group LLC, a research firm based in Minneapolis. Leuthold defines large stocks as those with a market value of more than $9 billion and small stocks as those from $300 million to $1.4 billion. "
The entire article is worth purusing for its discussion of large cap opportunities.
Big Stocks Lure Perkins, Grantham With Discount to Small-caps - Bloomberg.com

Nwsteve

 

[LOL!]

Small caps do better than large caps when coming out of a recession. The last recession was no exception.

 

[RonBoyd]

FWIW, Quantext gives this guess going forward:

 

[FUEGO]

I recently bought some of this on 4/8/2010 at 65.89/sh. Not a lot, just 0.5% of my portfolio is in this specific ETF now. Most of small cap value allocation is in Vanguard Sm Cap Value VISVX.

Maybe I'm the greater fool acting as a counter party to your trade?

No strategery involved for me, just rounding out the small cap asset allocation that was underbalanced.

 

[Nords]

Great article, Steve, thanks-- right up the alley of my confirmation bias.

Grantham, 71, wrote at the end of March that “high- quality” U.S. stocks would return 6.1 percent a year above the rate of inflation for the next seven years compared with a loss of 1.2 percent for small-cap stocks. Quality stocks have high, stable returns on capital and low debt, Grantham wrote on GMO’s Web site.

Holy cow, for Grantham this is the equivalent of bullish ranting like Jim Cramer during his lightning round...

Putting our portfolio in asset-allocation bands, and not chasing individual stocks, has made this a lot easier over the last few years.