Is that a Light?
2022. It’s been a wild ride but, there may be light at the end of the tunnel. Small cap portfolio managers, asset managers and investment managers interviewed in a recent Barron’s Streetwise podcast, say small caps are set to “outshine large-caps by close to four percentage points a year over the next five years”.
Experts point to the small cap effect, the Taper Tantrum during 2013, the Brexit referendum and the Covid-19 pandemic when small caps, typically nimbler than their larger peers, tend to outperform on the rebound. Barron’s adds that a big investment bank (Bank of America) is even more bullish for a small cap resurgence in the coming decade based on a significant underperformance over the last 5-10 years.
Small caps are currently trading at a significant discount, estimated at some 30%. Most believe they have already priced in a recession which similarly materialized during the global financial crisis in 2008. Adjusted for profitability, they look darn cheap compared to large caps. At the same time, investors consider more than just price looking at the larger macro-economic trends driving foundational change in the U.S. economy. Taking into account deeper multi-year trends that are expected to have a long-term effect on economic, politics and the market, small caps look particularly well-positioned for a bounce heading into 2023.
Beyond profitability, investors are screening for value and quality. Indexes are weighing companies by fundamental measures of value by cash flow, dividends, sales adjusted for leverage, book value and other intangibles. Of course, no two investors use the same valuation measures so bear this in mind when thinking through your marketing angles.
This is clearly positive news for small caps who have been beaten down over the past 11 months. The task for small caps will be to make the most of the opportunities that lie ahead. Leaders who understand which trends and catalysts will resonate the most—as quantified by research, funding and use-case development—will be better positioned in the year ahead.
Will you be ready for the rebound? This is the moment to revisit your investor materials and update your website. Get clear on your mission and positioning statements. It’s been a long year for investors too, and like all of us, look forward to a recharge over the holiday break. Take advantage of this time to prepare.
