Yesterday, Glencore stock registered a one day 29% decline. This rippled through the global equity markets and affected sectors other than commodities and mining. In the US, the government scrutiny on drug prices have spooked investors in health care and biotech companies. But frankly, it has been one thing or other this year. It appears… [Read More]
Small Cap Value Stocks
There is a body of research that shows that over a long investment horizon, small cap stocks have outperformed their large cap brethren. At the same time, value stocks outperform growth. In one study, Ibbotson Associates studied the annual performance of stocks classified by size (large, mid, small and micro) as well as by style (growth and value) between the periods 1969 and 2002. They found that the small cap value and micro cap value stocks far outperform all other asset classes. At the same time, small cap growth and micro cap growth are the worse performing asset class.
|Mean (%)||Mean (%)||Deviation (%)||Ratio|
Another interesting insight from this table is that for every capitalization class, the value stocks have smaller standard deviation from the mean, which implies that value stocks carry less risk than their growth counterparts with similar sized companies.
Looking at the Sharpe Ratio, which measures risk adjusted returns, it is striking to see the difference between the highest performing asset class (Small-Cap Value) and the lowest performing asset class (Micro-Cap Growth). Small Cap Value stocks have historically returned highest returns for any level of risk you are willing to take in your investments.
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Another study that measured asset class performance between 1927 and 2005 confirms a similar pattern.
|Total Stock Market||
Still, investors continue to focus on finding the next explosive growth story. For every Microsoft or Cisco Systems, there are literally hundreds of growth stocks that fizzle out. Odds of finding that one stock that will secure your retirement is slim, perhaps even less than the odds most casinos give you.
Why do Small Cap Value Stocks Perform So Much Better?
If you follow the Efficient Market Hypotheses, you would assume that if the markets are efficient, than any source of out-performance will be quickly eliminated as investors discover these stocks and pile on. However, there are very practical reasons why this does not happen in the real world.
- Small Cap Value stocks are generally very boring companies that no one has heard of. These are unglamorous companies, unlikely to garner much oohs and ahhs around the dinner table
- Investors over react to growth prospects and bid up the shares high. That is why growth stocks are expensive and provide smaller returns. On the flip side, investors over react and force the smaller value stocks down at the slightest whiff of bad news or general discomfort.
- There is insufficient coverage of these stocks on the Wall Street due to smaller size and lack of liquidity. As a result, they escape the attention of most institutional and retail investors who depend on brokers or sell side analyst’s recommendations
- Most institutions and funds are not allowed to own small cap and micro cap stocks and if they do come into possession of any such stock, perhaps due to a spin off, they are forced to sell off their position
Due to these reasons, there is little investor interest in small cap stocks. But enterprising value investors know that small caps offer the best places to find true value stocks that will on average comfortably beat the market over the long term.
Finding Promising Small Cap Value Stocks
With the coverage of these stocks so scant, a value investor literally needs to comb through the entire universe of small cap stocks to find promising candidates. With each of these stocks, the investor needs to go through the public filings and annual reports to understand the company, analyze the business and its financials and figure out a reasonable valuation of the company. Once this research in small cap stocks is complete, it is a matter of purchasing those stocks that offer good value and patiently wait for the market to understand its folly and discover these stocks. This is time and labor intensive work for most investors and a typical investor is not willing to patiently sit on his or her shares for a long time if immediate returns are not visible.
In terms of valuations, these small cap stocks are cheap. Some of these are cheap for a reason, specifically the companies in the oil and gas sector. My global oil demand/supply model indicates that we will see the oil prices rise again in the 2nd half of this year. At the same time, we have… [Read More]
The following is a recent screen I ran to find new small cap investment ideas in 2014. I am still reviewing these stocks in greater detail but as of now, a couple have already made it to my watch list. Company Name Symbol Industry Market Cap P/E Price/Book EPS Growth (5 Year Historical) ALASKA COMMUNICATIONS… [Read More]
We recently came across GNI with unusually high dividend yield. It is a special situation that warranted a deeper look to see if there is a hidden opportunity here somewhere. Great Northern Iron Ore Properties (“GNI” or “Trust”) owns interests in fee, both mineral and non-mineral lands, on the Mesabi Iron Range in north eastern… [Read More]
Peerless Systems Corporations (Stock: PRLS) is a company that specialises in licensing technology related to imaging solutions to OEM customers. PRLS sold their business in 2008 but still holds licenses to serve their current customers. Their Imaging business licenses are still profitable as seen in the ‘business section’ later in this report. Since the sale… [Read More]
Travel Centers of America (Stock: TA) operates two ‘travel center’ brands, TA and Petro. Travel centers are also known as ‘truck stops’ that offer parking bays, fuelling lanes, food services and resting amenities. They currently operate 214 outlets under the Petro and TA brands and have another 33 run as franchises. In 2007 Hospitality Property… [Read More]
The following 13 stocks have posted 52 week lows recently. Please note that since I have filtered for profitability, certain stocks that one might expect to be on this list (JC Penney, for example) are not listed. Tip: Click on the stock symbol to go to its own page where you will find other recent… [Read More]
The following small cap stocks feature high cash on the books, often worth close to or greater than the market value of the entire company, with little or no debt to speak of. Given these parameters, if these companies were liquidated today, an investor would get his or her money back and then some. When… [Read More]
If you are looking for energy stocks to round off your portfolio or add diversification, the following 4 candidates offer great values. Energy is a broad category and the shortlist reflects this by including oil transportation, oil and gas exploration and equipment companies and even a coal stock. While coal may be tainted with the… [Read More]
There is a value in growth, however it is difficult to figure out and bound to be inaccurate. Since the future growth can only be estimated, and the estimates tend to turn out widely different from the reality, it is hard to ascribe value to the growth with any real sense of confidence. One thing… [Read More]