Large vs Small Cap Stocks: Could the Past be Precedent

The chart shows that small cap value stocks have only been this cheap vs. large cap stocks at the peak of the dot.com bubble
The chart, from our paper Small Cap vs. Large Cap Stocks, highlighted that today might be a great time to look at Small Cap stocks
We have written over a dozen papers documenting the Nifty Fifty phenomenon, the hazards of money-losing stocks in index funds, the risks in the IPO mania and highlighted the remarkable resulting opportunities in forgotten GARP stocks

The risks to investors loom large in our opinion. At the same time, our research suggests this may be one of the best times for active managers who favor high-quality firms at reasonable prices. Please see our work on the opportunities in small cap companies, The Low Cost of High Quality.

With over a decade working together our research team has written a barrage of papers about the risks and opportunities in stocks of various market capitalizations. Investors obsessed with growth potential in large cap companies have sent valuations of certain stock prices to untenable levels in our view.

Our research piece on High-Quality Investing in Mid Cap Stocks presents evidence that there are opportunities to buy terrific companies at below average prices. That same research also provided data showing that many firms that lose money or lacked a real business model were trading at record valuations.

We understand investor’s affinity for low cost market index products that seek to replicate the total market. In his book, Margin of Safety by Seth Klarman, the legendary investor noted that index funds tend to become most popular during bull markets. Please see our upcoming publication of what we learned from Mr. Klarman’s legendary book. We believe many of today’s stocks provide a “margin of peril” to use a term from his timeless text.

Our quick post on the possible opportunity in Mohwak Industries stock price and Hillenbrand’s stock price are solid examples of how KCR embraces and uses a quantamental process to drive efficiency and discipline to the investment process.

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As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade. If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you. KCR also offers a wide range of easy-to-use but sophisticated tools. Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
Kailash Capital Research, LLC ’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias. L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

ADDITIONAL READING

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

SOURCES

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital Research, LLC and its affiliates (collectively, “Kailash Capital Research, LLC ”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital Research, LLC . In preparing the information, data, analyses, and opinions presented herein, Kailash Capital Research, LLC has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital Research, LLC , however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital Research, LLC and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital Research, LLC – All rights reserved.

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