Core Viewpoint - The micro-cap stock index has consistently outperformed major broad-based indices this year, attracting significant market attention. The excess returns are primarily driven by PB (Price-to-Book) recovery and valuation switching rather than profit growth [1][12]. Historical Performance - Data shows that the micro-cap stock index has outperformed major broad-based indices in most years since 2010, with the exception of 2017 and 2020, typically generating excess returns [2]. - Even with a reduction in trading frequency from daily to quarterly, micro-cap stocks continue to yield substantial returns, indicating the stability of their excess returns [4]. Macro Factors - Historical experience indicates two macro factors significantly influence micro-cap stock performance: 1. Micro-cap stocks tend to perform well when liquidity is abundant. 2. They also show better gains during periods of declining inflation, particularly in the latter stages of recessions and early recovery phases [5]. Drivers of Excess Returns - The core driver of excess returns in micro-cap stocks is valuation recovery. Analysis reveals that increasing trading frequency contributes minimally to excess returns, and that returns are not closely tied to profitability levels. Notably, micro-cap stocks with negative net profits have increasingly contributed to overall returns since 2018 [7]. - The report identifies that excess returns primarily stem from PB recovery and the switch from high to low valuations, with PB contribution and PB discount being the main sources of returns [7]. Investment Strategy - Data validation indicates that smaller market capitalization and lower PB values correlate with a higher probability of achieving excess returns over the next three months. Therefore, selecting small-cap stocks with low PB can effectively capture micro-cap opportunities [9][10]. Current Market Conditions - The current level of crowding in micro-cap stocks is at a historically high percentile, with valuations also at a relatively high historical percentile. Historical data suggests that when micro-cap PB is significantly higher than the overall market, their performance tends to be poor, as seen in 2017 and 2020 [10].