A bargain you can't ignore: Small-cap stocks are trading at their second-biggest discount in 20 years

Earnings per share of the S&P Small Cap 600 Index are expected to increase 14.1%, almost 6 percentage points higher than those of S&P 500.

Small-cap stocks, as a group, are bargain-priced relative to more popular large-caps, but you may be surprised at just how cheap they are. And wait until you see their performance from similar valuation levels.

In this article, we are focusing on the S&P Small Cap 600 Index, which is far more selective than the Russell 2000 because because most of its companies are profitable. Standard & Poor’s criteria for initial inclusion in the index includes positive earnings for the most recent quarter and for the sum of the most recent four quarters.

The small-cap group typically trades much closer to the valuation of the large-caps than it does today.In an extended bull market, driven in part by historically low interest rates, it is understandable that the best-known stocks have had the most benefit. But all of the above argue for adding exposure to small-caps for the long term, as part of a diversified portfolio, especially if you have a lot of money in an S&P 500 index fund or exchange traded fund.

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