This portfolio manager suggests investors switch to small caps

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Updated on Aug 15, 2024

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Sandy Villere says small caps are a good hedge against higher interest rates.
The Russell 2000 has outperformed SPX since pandemic lows in March 2020.
Villere sees upside in the small-cap insurance firm Palomar Holdings Inc.

The U.S. Federal Reserve is likely to raise interest rates next year that could higher multiple stocks. For investors looking for ways to hedge against it, Sandy Villere of Villere & Co says switching to small caps could be a smart move.

Villere’s remarks on CNBC’s “Power Lunch”

Villere quoted historical data to highlight that small caps usually outperform when Fed raises rates. Commenting further on why he’s long small caps, he said on CNBC’s “Power Lunch”:

S&P 500 is about 28% in technology versus Russell at about 14%. Technology does not do good in a higher interest rate environment. So, it’s a good time for small caps to outperform as they have more weight in financials which do quite well in the rising interest rate environment.

The Russell 2,000 index has outperformed the benchmark SPX with an over 100% gain since the pandemic low in March 2020, versus a nearly 95% gain in S&P 500.

Villere likes Palomar Holdings: here’s why

One small-cap name that pops out to Villere, in particular, is a California-based insurance company Palomar Holdings Inc (NASDAQ: PLMR) – a high growth stock that is down about 11% year-to-date.

They have incredible technology to get extremely granular on their underwriting, and they’re just at their infancy. In 2017, they had a $12.5 billion total addressable market, today, it’s more like $18 billion. So, we’re excited about this one.

Earlier this month, Palomar entered fronting sector of the U.S. insurance market. The $2.16 billion company has a price to earnings ratio of 203.10.