The Low Cost of High Quality: Russell 2000

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 here to download the Premium PDF Introduction: This paper employs similar analytical structures to those used in our newsletter High-Quality Midcap Value, The Case for Common Sense. In this paper, Kailash presents what we believe is compelling evidence that: Record Quality Spreads: The spreads between the highest and lowest quality firms in the Russell 2000 index have hit levels last seen during the internet mania Record Value Spreads: Like 2000, today, the lowest quality firms are trading at a very large premium to the highest quality firms; the only difference between today and 2000 is the spreads today are 2x wider Conclusion: With Quality & Value spreads both at the widest levels since 1978, today is the single best opportunity to buy high-quality small-cap firms in over 40 years https://kailashconcepts.com/wp-content/uploads/2021/11/icons8-vertical-line-50.pnghttps://kailashconcepts.com/wp-content/uploads/2021/11/icons8-lock-50.png Subscribe now to unlock the full content 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 YOU ARE NOW READING PREMIUM MEMBER LEVEL CONTENT Record Quality Spreads: Figure 1 shows the Return on Assets (ROA) of the Low-Quality and the High-Quality Firms within the R2000. Kailash defines “High-Quality” as those companies that have the ROAs in the top two quintiles (the top 40%) based on their ROAs. Conversely, Low-Quality firms are those companies with ROAs in the bottom two quintiles (the bottom 40%) based on their ROAs. Kailash highlights the brutal picture: https://kailashconcepts.com/wp-content/uploads/2021/11/icons8-vertical-line-50.pnghttps://kailashconcepts.com/wp-content/uploads/2021/11/icons8-lock-50.pngUpgrade your subscription now to unlock the full content Record Quality Spreads: Figure 1 shows the Return on Assets (ROA) of the Low-Quality and the High-Quality Firms within the R2000. Kailash defines “High-Quality” as those companies that have the ROAs in the top two quintiles (the top 40%) based on their ROAs. Conversely, Low-Quality firms are those companies with ROAs in the bottom two quintiles (the bottom 40%) based on their ROAs. Kailash highlights the brutal picture: • High-Quality: the highest quality firms in the Russell 2000 have seen their ROAs bounce between 8% and 11% between 1978 – 2018 • Low-Quality’s ROAs have never been lower than today • Into the peak of the internet bubble and the carnage afterward, Low-Quality ROAs plunged to -28% • At the depts of the Great Financial Crisis, Low-Quality’s ROAs collapsed briefly to -25% • Today, the broad Low-Quality has just bounced off a new all-time low of -40% Gripped by greed, some are engaged in rank speculation chasing overpriced firms of dubious quality higher. Kailash implores investors to take advantage of the remarkable opportunity to compound capital more safely1 by buying the highest quality small-caps at record discounts to low-quality firms. Record Value Spreads: Figure 2 shows the valuation of Low-Quality and High-Quality firms within the R2000. Kailash notes the following points we think critical: • The High-Quality and Low-Quality traded at what are optically very similar valuations based on Enterprise Value to Sales (EV/Sales) over much of the last 40 years • From 1978 – 1997, High-Quality firms traded at a consistent premium to Low-Quality firms • At the peak of the internet bubble, High-Quality firms suddenly traded at a significant discount to Low-Quality, which soared to 2.5x EV/Sales • Starting in 2010, as the Fed began pumping money into the system to restore the economy, the valuations of High-Quality stocks barely budged while the valuations of the speculative loss-making Low-Quality stocks began to soar to 4.7x EV/Sales today – nearly 2x the peak of the internet bubble • Post the Covid Crash, the valuation spread between High-Quality and Low-Quality exploded as the Fed purchased a staggering $37bn in assets daily, growing their balance sheet from $4 trillion to over $7 trillion in just 81 days2 While compelling, Kailash believes the chart above creates an optical illusion that significantly understates the valuation error we believe exists today. With two lines of EV/Sales over 40 years, it can become difficult to see that optically small variations are actually significant representations of value spreads. Record Value Spreads: To help bring clarity to the magnitude of today’s valuation distortion between High-Quality and Low-Quality, Fig. 3 below shows the EV/Sales ratio of High-Quality firms minus the EV/Sales ratio of Low-Quality firms. To state the obvious: • How the chart works: When High-Quality firms trade at a premium to Low-Quality, something that makes conceptual sense, this method of subtraction will yield a positive outcome. Examples: o High-Quality has an EV/Sales of 1.5x and Low-Quality has an EV/Sales of 1.0x then High-Quality – Low-Quality 1.5x – 1x 0.5x. High-Quality is more expensive than Low-Quality o When investors ignore High-Quality and chase Low-Quality, the outcome will be a negative number. Example: High-Quality has an EV/Sales of 1.0x, and the Low-Quality has an EV/Sales of 1.5x, then High-Quality – Low-Quality 1.0x – 1.5x -0.5x. In these instances, the line will go below zero, indicating High-Quality can be purchased cheaply relative to Low-Quality • Looking at the chart, the situation is as blunt as it is unforgiving: in 40 years of history, High-Quality Firms have NEVER been cheaper vs. Low-Quality • Kailash reminds its readers to look back at the first chart – this valuation anomaly is going on at a time when the Low-Quality is experiencing their lowest ROAs in 40 years Similar to our work on Midcap Quality, the Small Cap R2000 universe is potentially offering investors a generational opportunity to buy the highest quality firms available at record discounts to the index’s lowest quality firms. Conclusion: A Look at Low Quality Figure 4 below shows the compound returns on $1 invested in the Russell 2000’s Low-Quality firms. Kailash draws your attention to the following: • These are less than inspiring numbers, but Kailash notes that there are indeed times when it pays to play in the trash: in the three-year run-up to the peak of the internet bubble, Low-Quality ran 120% - a feat only matched by the last three years, when Low-Quality has run 108% • Kailash believes that history rhymes – post the peak of the internet bubble, Low-Quality experienced a monumental crash, falling 83% over 32 months • If you bought Low-Quality at the peak of the internet bubble, it took over 17 years to break even Kailash reminds readers of the data from Fig. 2 – the only difference between the Low-Quality firms in 2000 and today is that in 2000 they were valued at 2.8x EV/Sales; whereas today they are nearly 70% more expensive. In our minds, this means the inevitable collapse will be that much more severe. Conclusion: Comparing Kailash High Quality to High Quality and Low Quality Kailash recognizes that High-Quality and Low-Quality are each 40% of the Russell 2000. That means shopping among High-Quality firms requires a reader to look at nearly 600 names. Kailash created a third group, dubbed the Kailash High-Quality group. The Kailash High-Quality group is made up of those names in the High-Quality that are also in the top 100 of the Kailash SMID model. This group averages a fairly stable 31 names a month. Kailash believes speculation in Low-Quality has never been more dangerous and the opportunity in High-Quality never more compelling than today. In Fig. 5 below, we present the returns to the Kailash High-Quality, High-Quality and Low-Quality groups, respectively. We would note that the red line you see in Fig. 5 is the same line as in Fig. 4 on the prior page. Kailash highlights the following: • Despite the recent 200%+ run over the last three years, Low-Quality investing is a terrible strategy, generating just 4.7% annualized returns with 27% standard deviation leaving you with only $7 since 1989 • High-Quality investing is a much better strategy, generating just 8.5% annualized returns with a 19% standard deviation – since 1989 buying High-Quality firms leaves you with $30 • Generating annualized returns of 11.3% with a standard deviation of 19%, Kailash High-Quality trounces buying a broad basket of High-Quality firms, leaving investors with 3x the money or $90 Kailash believes the implications are obvious: buying high-quality firms works over the long haul. Our model can help optimize your time by bringing focus and a long record of success to your process. Conclusion: A Fundamental Comparison of Kailash High Quality, High Quality and Low Quality As a final sanity check, Kailash shows the fundamentals of Kailash High-Quality, High-Quality and Low-Quality groups in Fig. 6 below. Looking at the three groups’ fundamentals, the conclusions are obvious in our view: • Kailash High-Quality firms trade at cheap levels both absolute and relative to the bench while producing prodigious cash flows and healthy yields • High-Quality firms look terrific relative to Low-Quality firms, but at nearly 2x the P/E ratio with far lower FCF yields, Kailash believes starting in our model’s top ranks and then shopping in High-Quality to find firms with faster 3-year revenue growth would be a healthy process • Low-Quality firms almost defy belief – priced at exorbitant multiples of revenues, these firms hemorrhage money and, if history is any guide, Kailash would not be surprised to see many of them delist when the tide inevitably goes out Exhibit: 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’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. 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. Speculative Investment Enroned Vanguard Small Cap Mean Reversion Trading Strategy Small Cap Vs Large Cap Funds Cheap Dividend Stocks Under $5 Nabors Industries Stock Price In our view! Comment is intended Board of Governors of the Federal Reserve System 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, LLC and its affiliates (collectively, “Kailash Capital”) 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. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital 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, LLC – All rights reserved. Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.