INTELLIGENT VALUE KNOWLEDGE BASE

SMALL-CAP STOCKS

WHY SMALL CAP STOCKS?

Why does IntelligentValue invest in small cap (less than $1 billion market cap) stocks? Because that's where the returns are!

Small cap stocks are not covered by analysts as much as the larger companies. That means that they have more opportunity to be undiscovered and to have undervalued prices. Companies such as Conoco and Target have many analysts dissecting every aspect of the company and estimating it's earnings down to the penny. Small caps have none of that. Most have no analyst coverage and prices move on rumors and momentum.

Small caps by definition have more opportunity to grow than large caps. For a $100 billion company to grow 10% in a quarter, it must generate $10 billion in new business. But a company that has $50 million in income only has to generate $5 million in new business. Which is easier, $10 billion or $5 million? It's much easier for small companies to grow than large companies.

On Dec. 21, 2005, Morningstar published a study of the value creators and value destroyers in 2005. The company was surprised by the results. You can see the entire article here, but the results of its top value creators/destroyers is below. You can see that small caps dominated the returns!

The Results

"Our first insight came as a bit of a surprise. We did not expect to see the continued dominance of smaller-cap companies over larger ones. In fact, the data show that less value is added as company size increases. Micro-cap stocks--firms with less than $100 million in market capitalization--added a whopping 31% to their values despite having booked above-average gains over the last five years. Conversely, the mega-cap stocks--stocks with more than $100 billion--actually posted a small decline in value." - Morningstar.com

Ibbotson Statistics

Even more compelling are the well-known statistics provided by Ibbotson and Associates, which did a study of stock returns for various sized of stock going all the way back to 1927. Ibbotson has been collecting market data for almost a century and its results show that $1,000 invested in small-cap "value" stocks in 1927 would have become more than $33 million by now. Granted, that's 80 years or so, but the fund was only started with $1,000. A $10,000 investment would have become $330 million. Even better than that, our finely tuned systems produce returns in many cases 10 times the average returns of the Ibbotson general study!

A a comparison, if you had invested in a broad basket of small caps, you would have received 1/3rd less. And your investment in generic small cap value stocks would have produced a return 15 times greater than if you had put that money in large cap stocks (they ones you hear about daily).

You can try to find these value stocks on your own after reading all the works of Benjamin Graham or the ideas of Warren Buffett, but a better idea would be to simply continue your subscription to IntelligentValue.com and buy our recommendations.

When we started, we focused on finding the highest returning stocks that exist based on years of back-testing millions upon millions of stock trades over many, many years. If that testing showed that (for example) large-cap healthcare growth companies had the highest return, that's what we would provide to you. But guess what? The highest returning stocks turned out to be small-cap value stocks! Hands down - no question about it - small-cap value stocks are where you have the best potential for return in all market types. And that's the focus of IntelligentValue.com!

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