Did you know that during the 2008 financial crisis, small-cap stocks fell nearly 60%, compared to a 40% decline for large-cap stocks?

Smaller companies can be more at risk during economic downturns, which is why it’s important to develop risk tolerance.

In this edition of our newsletter, we’ll look at the following:

• What’s Wrong With Nike? First, despite the booming athletic wear market, Nike is facing significant challenges this year 👟

• Why Are Small Company Stocks Struggling? Next, once a reliable growth engine, small-company stocks have been underperforming 📉

• Struggle Is An Opportunity: Finally, we reflect on how challenges can be transformed into opportunities 💪

Tomorrow, markets will be closed due to Independence Day (July 4th), meaning that there will be no Equity Eats, but we’ll be back on Friday with more insights.

Stay informed as we navigate the world of finance and investing. Enjoy!

What’s Wrong With Nike? 👟

It feels like a golden age for athletic wear.

So why is Nike struggling?

Nike investors aren’t used to watching the stock take this kind of beating.

Shares have tumbled 12% this year—and it isn’t hard to see why 📉

China’s uneven economy has meant slower sales, while the high cost of living has also weighed on consumers elsewhere.

Nike’s long innovation cycle resulted in inventory problems and created an opening for competitors like Hoka maker Decker Outdoor and On Holding, which have both climbed 50% this year.

It’s a lot of bad news, but much of it is already baked into the stock, with shares trading at a 25% discount to the historical average.

What’s more, Nike appears to have new shoes coming that could excite shoppers again, while the Summer Olympics, set to start in late July, should be another catalyst for the stock.

The tough times for Nike, which is due to report earnings on June 27, should be coming to an end 😌

Why Are Small Company Stocks Struggling? 📉

Small-company stocks, once a reliable growth engine, have been struggling for years.

Over the past decade, the S&P 500 small cap index has returned 8.2% per year versus the S&P 500 which has returned a 13.2% per year on average.

Today, only about 60% of small cap stocks in the Russell 2000 index are profitable, down from 70% before the pandemic ☹️

Going back to 1927, small caps have returned 11.7% a year, on average.

No one is quite sure why so many smaller companies are floundering.

One theory is that years of near-zero interest rates helped keep too many shaky companies afloat.

Another is that, partly because of onerous regulations, many attractive, fast-growing companies are choosing to stay private.

What can investors do? 🤔

One solution is to try to recreate the small-cap market of yore by titling your portfolio toward smaller companies that are profitable.

The S&P Small Cap Quality Index has returned 9.8% a year over the past decade, beating the generic version of the index by 1.6 percentage points.

Its returns nearly matched those of the S&P 500 until 2023, when the market’s mega caps really began to take off.

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Struggle Is An Opportunity 💪

Every setback and every obstacle is an opportunity for growth.

We each have our own little corner of the world to repair.

And these challenges we face are God's expression of confidence in our ability to make the world a better place 😇

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