First a message from our friends at Stansberry Research (sponsor) |
My Epstein Story |
Dear Reader, |
A few weeks ago, my name appeared in the Epstein files. |
I won't dramatize it. I wasn't accused of anything. I wasn't involved. |
But I did something most people don't do when they see something that doesn't add up. |
I spoke up. |
Years ago, when I thought a financial tip might help law enforcement understand how Epstein operated, I shared it. Discreetly. Without expecting anything in return. |
That instinct... to step forward when something feels wrong... is the same one that led me to warn about the dot‑com bubble... the housing collapse... and several major market dislocations before they became obvious. |
And it's why I'm speaking up again now. |
Because something fundamental is shifting in America. |
The cost of living no longer matches how much money we make... |
We can't keep our promises to younger generations. |
And artificial intelligence is accelerating changes most people are not prepared for. |
One Wall Street strategist recently called what's coming a "violent reset." |
I agree with the direction, if not the language. |
There is a line forming between those who understand what's happening... and those who don't. |
I've laid out what I'm seeing and, more important, what you can do about it, in detail. |
Click here to read it while you still can. |
Regards, |
Whitney Tilson
Editor, Stansberry's Investment Advisory |
|
BONUS ARTICLE |
Small Caps vs. Mega Caps: The Gap Is Wide—So Where's the "Quality" Trade? |
When "small caps are back" hits the timeline, most people do the lazy thing: |
They buy the whole Russell 2000 and call it a day. |
That's how you accidentally buy a basket where roughly 4 out of 10 companies don't make money—and then act surprised when it behaves like a levered bet on rates and risk appetite. |
The better trade (and the one analysts are circling) is more specific: |
reversion to the mean + a rotation to quality. |
Because the gap between small and large caps is real… but the dispersion inside small caps is even bigger. |
Let's break it down. |
|
Scoreboard / What Happened |
1) The "gap" is showing up in performance |
Small caps have come out hot in early 2026. The Russell 2000 was up ~7.3% YTD as of Feb. 20, while the S&P 500 was up only ~0.5% (per AP's index recap). |
That performance differential is exactly what "reversion to the mean" narratives feed on: investors notice a long stretch of large-cap dominance, then they hunt for the catch-up trade. |
2) The "gap" is also showing up in valuation |
One market commentary pegged small caps (Russell 2000) around ~18x forward earnings versus the S&P 500 at 22x+. |
You don't need perfect precision here. You need the direction: small caps are cheaper on forward multiples—but with a big asterisk we'll hit next. |
3) The asterisk: quality dispersion |
Schwab cited Bloomberg data showing (as of mid-April 2025) ~44% of Russell 2000 companies were unprofitable, versus ~20% in the S&P SmallCap 600, which has profitability requirements for inclusion. |
This is the hidden truth: |
"Small caps" is not one trade. It's two trades stapled together. |
Profitable, durable compounders Speculative, rate-sensitive, cash-burning "optionalities"
|
A mean reversion cycle tends to reward the first group after the initial risk-on burst. |
|
The Real Reason: Why "Reversion to the Mean" Is Showing Up Now |
Mechanism #1: The market is trying to diversify away from mega-cap gravity |
When the biggest names stop carrying the whole index, money looks for "the rest of the market." |
That's not theory—it's what people mean when they talk about broadening leadership. |
And small caps are the purest form of "the rest of the market." |
Mechanism #2: Small caps are more rate-sensitive (for better and worse) |
Smaller companies typically have: |
higher floating-rate exposure higher refinancing sensitivity less margin buffer when input costs rise
|
So when investors smell lower inflation risk or even rate cuts down the road, small caps get bid first. |
But here's the Cheap Investor translation: |
Rates are the throttle. Quality is the roll cage. |
Mechanism #3: "Mean reversion" isn't just an index call—it's a quality call |
Boston Partners highlighted that prior small-cap rallies have been dominated by highly volatile and unprofitable names, and argues leadership can shift toward a higher-quality cohort. |
WisdomTree made a similar point: don't confuse speculative small-cap strength with durable small-cap strength—because the valuation gap inside small caps has widened. |
That's your edge: buying the reversion trade, but with a filter. |
|
Company/Theme Deep Dive: "High-Quality Small Caps" (What That Actually Means) |
Forget buzzwords. Here's a working definition you can use: |
Quality signals that matter (the Cheaplist version) |
Profits and cash generation (not just revenue growth) Balance sheet resilience (low leverage, or leverage that's clearly serviceable) Pricing power / backlog / recurring revenue (visibility) Margins that don't collapse in a normal slowdown A catalyst for rerating (not "hope," something measurable)
|
There are also index-based ways to enforce quality: |
The S&P SmallCap 600 uses profitability screens (one reason many investors prefer it over Russell 2000 exposure). FTSE Russell recently highlighted the Russell 2000 Earnings Leaders Index as a rules-based "positive earnings / improving profitability" lens.
|
|
Hidden Value Plays That Can Fly Under the Radar (With Real Numbers) |
Below are examples of "quality small" setups where the business model has clearer cash-flow gravity than the average small-cap basket. |
1) Comfort Systems (FIX) — "boring" contractor, very un-boring backlog |
Why it fits quality: |
|
Concrete datapoints: |
Q4 2025 revenue: $2.65B vs $1.87B prior year. Backlog: ~$11.945B (reported surge in Q4). 2025 revenue: ~$9.10B and operating cash flow ~$1.19B (reported in filings/news summaries of results).
|
Cheap Investor angle: |
|
2) SPS Commerce (SPSC) — small-cap compounder hiding in supply-chain plumbing |
Why it fits quality: |
|
Concrete datapoints: |
Q4 2025 revenue: $192.7M, up 13% YoY. Full-year 2025 revenue: $751.5M, up 18%; adjusted EBITDA margin ~31% (per filings summary).
|
Cheap Investor angle: |
In a "reversion" market, investors rotate into companies that can grow without heroic macro conditions. SPSC is the kind of name that can hold up if the economy is just… normal.
|
3) Onto Innovation (ONTO) — profitable semi tools exposure without mega-cap pricing |
Why it fits quality: |
|
Concrete datapoints: |
Company guidance cited: gross margin ~54.6%–55.6%; GAAP operating margin ~14.2%–15.6%; non-GAAP operating margin ~25.5%–26.5% (near-term guide band). Investor materials show Q4 gross margin around ~55%.
|
Cheap Investor angle: |
|
4) Rambus (RMBS) — a cash-generative IP + chips hybrid (with volatility) |
Why it fits quality (with caveats): |
|
Concrete datapoints: |
Q4 2025 GAAP revenue $190.2M; cash from operations $99.8M in the quarter. Reported gross margin ~61.5% for the year (call transcript summary). Stock reaction risk: guidance can swing the tape (recent "soft guidance" drawdown was real).
|
Cheap Investor angle: |
This is a "quality business, noisy quarter-to-quarter" name. If you hate volatility, size it smaller or don't touch it. If you can stomach it, it's a real cash-flow engine when execution is on track.
|
|
"Is It Cheap?" — The Only Valuation Test That Matters Here |
Here's the trap: small caps can look "cheap" and still be expensive if they're levered and unprofitable. |
So use a two-step Cheap Investor test: |
Step 1: Cheap relative to large caps (the macro setup) |
|
Step 2: Cheap relative to its own quality |
|
Translation: don't pay up for junk just because it's smaller. |
|
Bull / Base / Bear Scenarios |
Bull case: clean broadening + easing financial conditions |
Rates stabilize or drift lower Investors rotate from mega-cap concentration into breadth Quality small caps rerate as earnings durability is rewarded
|
What wins: |
|
Base case: choppy macro, but earnings normalize |
Small caps keep working, but the "easy beta" phase ends Leadership rotates from unprofitable flyers into profitable operators
|
What wins: |
|
Bear case: rates pop, credit spreads widen, refinancing risk returns |
|
What wins: |
|
|
Actionable Plan (No Hype, Just Process) |
1) Decide what you're actually buying |
Pick one lane: |
Lane A: Broad small-cap beta (higher volatility) |
|
Lane B: Quality small caps (my preference for "reversion" durability) |
|
2) Use a 1/3 – 1/3 – 1/3 scale-in framework |
Starter position on a normal pullback (don't chase) Add if relative strength holds (small caps outperform on down days) Add only if fundamentals confirm (margins/backlog/recurring revenue trends)
|
3) Build a "quality small" watchlist with specific catalysts |
Examples from above: |
FIX: backlog + cash flow execution SPSC: recurring revenue + margin profile ONTO: margin structure + guidance band RMBS: high gross margin model, but watch guidance volatility
|
|
Cheap Investor Checklist / Scorecard (Next Week's Dashboard) |
Russell 2000 vs S&P 500 relative trend (does outperformance persist?) Small-cap "quality" vs "junk" leadership (are unprofitable names fading?) Credit spreads / refinancing headlines (small caps are sensitive here) Earnings: backlog, recurring revenue, and margin commentary (FIX/SPSC/ONTO-style signals) Watch the profitability screen story (S&P 600 vs Russell 2000 narrative keeps spreading) Market breadth (equal-weight and broader participation tends to help smalls) One red flag: "small caps up, but only because junk is ripping"
|
|
Bottom Line |
If this is truly a reversion-to-the-mean cycle, the winning small-cap trade likely shifts from "anything with a ticker" to profitable, balance-sheet-resilient operators. |
If rates behave and breadth keeps improving, quality small caps can rerate without needing a perfect economy—because the setup is less about hype and more about the market closing an unusually wide gap. |
If you want, tell me your risk posture (conservative vs aggressive) and whether you prefer industrials, software, or semis, and I'll build a 10-name "quality small-cap" Cheaplist with a one-page scorecard for each. |
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Investing involves risk, including the potential loss of principal. Always do your own research before making investment decisions. |
|
|
|
|
