Will small caps beat the FTSE 100?

As we enter the traditional summer lull that stock markets often go through, share prices will tend to edge downwards. This means that it’s an ideal time to bag a bargain.

The question is, should you go for small cap stocks or FTSE 100 companies? Let’s take small caps first.

Growth companies have taken a hit

We’ve seen a whole range of growth firms taking a hit in the past few years. Many of these businesses took a knock whether they were doing well or not. Just as all boats rise and fall with the tide, so small caps have risen and fallen as stocks have cycled up and then down.

Even though this is the case, many investors, myself included, have suffered badly from the bear market in growth shares. The names that have crashed have included a number of investor favourites: Quindell, Blinkx and Asian Citrus are particularly painful memories.

Yet other stocks have stood up remarkably. The valuation of betting company GVC has been on the up, and after last year’s scandal, Plus500‘s share price is climbing once again.

It’s after these share price falls that the best bargains can be found, if you have the courage to dip your toe back in the water. This is basically now contrarian investing and it is, by its nature, difficult. Because when you buy into a stock, you want the comfort of knowing that others are doing the same, whereas contrarians have to go against the grain, and buy-in while others are selling.

This is a stock picker’s market

But what about FTSE 100 companies? Well much of what I have said about growth firms also applies to these blue chips. Many, including big names such as HSBC, Next and Shire, have also taken a beating as investors have fled shares. But this means that there are a whole range of bargains for canny stock pickers to buy into.

But, just as with small caps, you need to choose your purchases well. You need to avoid firms that are subject to strong cyclical downtrends, such as Royal Dutch Shell and Rio Tinto, or firms that are unlikely to return to profitability any time soon, such as Tesco or Royal Bank of Scotland.

But businesses that are highly cash-generative and have prospects for growth, such as AstraZeneca and Barratt Developments, may be just the ticket.

So should you invest in small caps or in FTSE 100 shares? Well, my view is that you should look at both. But although I think we’re just at the beginning of a slow-building global bull market in shares, I believe that to do well you have to be a stock picker.

Choose a few of the highest quality shares, whether it be growth companies or FTSE 100 titans, and then wait for them to grow. But, remember, there’s no quick route to millions. You’ll have to be patient.

If you're warming once again to small caps, and are looking to dip your toe back into the water with that perfect pick, then we have just what you're looking for.

The Motley Fool’s analysts have identified what they consider to be one of the indices’ top small-caps whose potential upside, they reckon, could be as great as 50%! We firmly believe this is an excellent company with great growth prospects.

To read about 1 Top Small-Cap Stock From The Motley Fool just click on this link and it will be dispatched instantly and free-of-charge to your inbox. Don't miss out!

Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.