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Planet MicroCap Podcast | MicroCap Investing Strategies
The Death of Small Cap Equities? with Chris Satterthwaite, Senior Analyst at Verdad Advisors
Dec 5, 2023
Chris Satterthwaite, Senior Analyst at Verdad Advisors, discusses the downfall of small cap equities, exploring factors such as declining quality of small caps, analysis of gross profit to assets as a key quality metric, decline in quality amongst small cap companies, structural issues of the Russell 2000 index, changing perception of private equity, and the changing market composition with a focus on opportunities for small-cap investors outside the US and in specific industries.
34:39
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Quick takeaways
- The decline in small cap equities is attributed to a higher proportion of unprofitable companies, especially in healthcare and technology sectors, and the influence of private equity.
- Investors should focus on quality and valuation when selecting small cap companies, as the changing composition of small cap indices presents both challenges and opportunities for investors.
Deep dives
Understanding the Decline in Quality of Small Cap Equities
The decline in quality of small cap equities has been a topic of discussion in the investment community. It is observed that small cap stocks have been underperforming large cap stocks for a prolonged period, which raises questions about the factors driving this trend. One hypothesis is that the composition of small cap stocks has changed, with a higher proportion of unprofitable companies, particularly in the healthcare and technology sectors. Private equity has played a role in this shift, as higher-quality companies are being taken private or staying private longer. Another hypothesis is that there are structural changes affecting the profitability of small cap companies, or that this decline is cyclical and related to the macroeconomic environment. The decline in quality is more significant in the US market, while Japanese and European markets show more stable or increasing signs of quality among both large and small caps.
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