Stock Prices & The Might of Mean Reversion

Making Simple Concepts Work for Your Investments:

We have written a number of papers about the simple math that makes large cap investing in even high quality names difficult
The chart below takes the market of large cap stocks and divides that by small cap stocks
Large Caps have pulled back from an extreme to a level last seen at the peak of the internet bubble
There is still a great deal of potential for Small Caps to significantly outperform their Large Cap peers
As documented in our research, we believe that asset bloat in index funds and speculative ETFs that focus on loss making firms with massive market caps has caused this anomaly

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Please look out for our upcoming Quick Take explaining the magnitude of the opportunity and some promising Small Cap candidates we believe may be great investments!

The Need to be Macro Aware:

KCR’s research team is consistent in its willingness to avoid forecasts. As Buffett once quipped, “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” With that said, the price increases of the largest stocks in the S&P 500 have been nothing short of ballistic.

How Higher Prices Could Help Small Stocks:

We have written about consumer staple stocks and soaring food prices make some of the stock market’s most simple stocks appealing in our view. The price shocks you see at the grocery store are the kind of odd items that can eventually erode the huge valuations ascribed to many large cap stocks.

In contrast, the emergence of antiviral pills and other supplements to the vaccines may cause the domestic economy to boom while global markets continue to struggle with higher levels of macro uncertainty. In an environment like that, Wall Street’s current obsession with the FAAMNGs might prove misplaced. Stocks of smaller domestic companies could thrive while larger firms struggle with supply chain disruptions.

These types of micro and macro interactions are not things anyone can predict. What our research does show, however, is that the market currently prices in almost no chance of large stocks losing the economic tailwinds that have helped them for decades. Similarly, many smaller domestic stocks have stock quotes the indicate virtually no chance for brighter days ahead.

As always, KCR believes what you pay matters. The lower the valuation the more negative shocks a stock can take and the more likely you can benefit from multiple expansion. Please check out our Charts, Quick Takes and White Papers to learn more!

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SERVICES

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.

Click the following to read more about Are Energy Stocks Undervalued, Mean Reversion Trading

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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