Small-cap growth tough in current interest rate climate

One of the fun parts of investing, whether professionally or as a private investor, is finding that special small-capitalization name and running with it. Typically, a company with a market value, or market capitalization of $1 billion or under, is considered small capitalization. Some investors place that number at $3 billion or under, but the professional investing world uses $1 billion as the measuring stick.

Many companies that trade at $1 billion or under market cap are newer, less established companies that try to make their mark in their respective sectors. With the 10-year U.S. Treasury note sporting a current yield of 5.16%, it's a tough environment for these stocks to garner attention, or serious buying. Small cap names need a friendly interest rate scene to capture serious investors interest. The "safe yields" of the 10 year note over 5% negates the attractive growth rates that small cap stocks can provide.

Small cap names tend to carry a lot more risk as they are less consistent when it comes to earnings. With "easy money" earnings north of 5%, these stocks are difficult to move up to higher valuations. Many a portfolio manager will tell you it is a great time to accumulate these types of stocks as sellers are sometimes sloppy in their selling style, thus allowing for bargain pricing for the buyers.

Small cap stocks can be the best performing sector of the market in a lower interest rate environment, but investors will scramble for larger cap, paying dividends names in high interest rate times. Consistent dividends means consistent earnings.

As we enter this second quarter earnings season, identify your small cap favorites and nibble away at bargain prices. Here are some my small cap growth ideas: Top 25 stocks for the NEXT 25 Years. Eventually, the stock market rewards earnings growth with higher valuations. Always has. Always will...

Georges Yared is the Chief Investment Strategist for Yared Investment Research.