Value Spreads in Small Cap: UPDATE

Executive Summary

Introduction: In May 2014 we published the white papers “Bubble Trouble? Comparing the Current Markets to 1999 and 2007” and “Comparing the Small & Mid Cap Valuation Tails: Low Dispersion, Reduced Opportunities & Fundamental Fixes.” In that work, we surmised that the R2500 was in the “Value Doldrums” which indicated that the cheapest stocks would likely underperform the most expensive stocks (i.e., growth would likely outperform value). This came to fruition over the last 13 months, with the most expensive stocks soaring in value despite deteriorating fundamentals.

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Conclusions:

1) Median P/S valuation has soared 60% for the most expensive SMID decile since our earlier papers while profitability, as measured by the percentage of companies that are profitable, has deteriorated by a significant 13% points to only 35% of the companies being profitable. One could infer from the below charts that the excess returns of the most expensive decile came entirely or primarily from multiple expansion and not an improvement in fundamentals.

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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.

Click the following to read more about Are Energy Stocks Undervalued, Vanguard Small Cap Index Admiral

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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