Today’s presentation is going to be an update on the bull case for high quality small cap stocks we made in May of 2021. In that May 2021 piece, we highlighted the following three key factors that endeared us to small caps in general, but particularly to KCR’s Small Cap Model portfolio.

(Please view KCR’s Small & Mid Cap Portfolio – Nov 2022 at the bottom of the transcript.)

Slide 2 – DISCLAIMER

First, we explained that the spread in raw market cap between large cap and small cap stocks was bouncing off a three standard deviation low

Second, we highlighted the hugely problematic nature of large cap indexes which featured valuations that were, at the time, significantly above the levels seen at the peak of the internet bubble

Third, we highlighted the power of KCR’s Small Cap Model portfolio vs. the Russell 2000, expressing our now long held and much discussed belief that the small cap indexes are deeply flawed constructs bloated with overpriced loss-making companies.

Slide 3 – Agenda

Over the course of this presentation, we will quickly update you on every one of these items per the agenda you see here. We are going to show how the recent sell-off has materially improved the case for KR’s small cap model portfolio. Before we do that, I think it is really important for us to acknowledge what we got right and what we got wrong.

 

Slide 4 – Small Cap vs. Large Cap: Update & Mea Culpa

As money managers ours