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Small-Cap Value Investing

Writer's picture: Ally ChanelAlly Chanel

Updated: Aug 24, 2022

Factor-Based Investing Continues

There are so many ways to look at investing, it's easy to get lost in the mumbo jumbo.

Our goal is to teach the language of investing so you can be confident in your financial decisions.


Last week's blog post introduced the concept of factor-based investing which is all about selecting assets that have a higher potential return while lowering risk through economic, fundamental and statistical analysis.


If you are wary of risk-taking with your investments, a factor-based investment strategy with ample defense can give you more confidence with its targeted investment strategies.

This week, we will hone in on two subsegments of factor-based investing: small cap and value companies.

Small cap = more potential

In America, most businesses are not industry titans like Apple and Microsoft. Instead, they are mom-and-pop shops that have grown into more giant yet still "small" corporations.

When referring to small capitalization corporations, we focus on companies worth between $300 million and $2 billion. An example of a company in this market segment includes Coursera, an online learning platform co-founded by Daphne Koller in 2012.

Because these companies are big but not nearly as sizable as companies worth almost $1 trillion, it is easier for them to grow and outperform their larger piers.

Value

Valuations on Wall St. can be highly speculative, based on fundamentals, or both. When aiming for value-based companies, one is seeking companies whose share prices have retreated or are underpriced relative to their earnings per share, cash flows, and other financial indicators.

Companies in this segment that are poised to increase profits and improve their financial sheets have the potential to grow faster.

Small cap + Value = great team

Historically, small-cap value-oriented companies have outperformed the broader market over extended periods. While others have downsized their holdings in this community of businesses, investors who purchase this subsegment and stick to a diversified strategy with ample defensive exposure can build a plan that potentially accomplishes their financial goals.

Risks

It is essential to know that these companies are vulnerable to price swings that can be larger than more prominent companies. Further, this strategy has only worked when employed over extended periods, similar to child raising. In the near term, small-cap value stocks can and may underperform.

It isn't a quick in-and-out investment strategy. Instead, investing in small-cap value requires dedication and persistence.

Invest on your terms

At Lundeen Abrams Advisors, we help you achieve your goals by helping you make good decisions in your portfolio and also in your life strategy. We are your trusted advisors and are here to help.

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