I have to say that the screen today is an absolute gold mine for classic value investors! 43 stocks in a variety of sectors and industries that are trading way below their book values. To add to this, each of these companies have very little debt (as seen with the low debt/equity ratio). So as… [Read More]
Small Cap Value Stocks Outperform Large Caps and Other Asset Classes
Over a long investment horizon, small cap stocks deliver superb investment returns, better than any other asset class and many percentage points better than the market as a whole. Once we have reviewed the evidence, you can read the articles and screens we publish regularly that aim to find new small cap stock ideas for our readers. We can also send you all these ideas and screens in your email as they are published so you never miss them.
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.
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.
These 8 small cap stocks to watch sport a price to earnings ratio under 15, and nice sub-1 price to book ratio and a solid 10.5% earnings growth or better in the past 5 years. Small cap stocks at Value Stock Guide are less than $1 Billion in market cap and over $30 million in… [Read More]
With the market so volatile and the investors generally heading for the exits, many good companies can be acquired today for cheap. The following 7 stocks appear to be good buys right now with terrific valuations and solid history of earnings growth. In a few cases, the undervaluation is extreme due to temporary issues. Each… [Read More]
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]
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]
As you probably know, American Greetings (AM) is going private. A group of the founding family members (Weiss) have offered $18.20/share and the board has accepted the offer. The deal is expected to close in Jul 2013. I recommended and bought the stock first in Dec 2011. Over the last 15 months, I have added… [Read More]
While updating the portfolio performance figures today I realized that I did not report the sale of DEXO from the Premium portfolio, as I typically do for my readers. So here it is DEXO Sale On Oct 25, I sold out of the remaining 50% of the DEXO I still owned and recommended the members… [Read More]
There are actually two sales to report. Tuesday Morning (TUES) was purchased on Mar 9, 2012 at an average cost of $3.64/share. Last week, on Sep 9, 2012, the entire position was liquidated at $6.26/share for a gain of 71.18% Another partial sale was made on Aug 21, 2012 on a stock that I still… [Read More]