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You Want Outsized Returns? Start Small.
Large caps are still pricey and still too crowded
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Safety Comes At A Price
There was a tweet that I sent out last month that garnered a lot of attention and recommendations.
I still stand by this because, during 2021/2022, the flight to safety in large caps has been overdone. It was only a matter of time before they themselves suffered from guidance cuts and loss of faith from money managers.
But even after the big names have held on for so long, they’re still expensive.
Let’s take a look at the above chart. Relative to other buckets, the S&P 500, Growth, and Value indexes are incredibly overvalued to their peers.
The reason that I’m showing this is that I do think that small caps are really going to come out of this turmoil in much better shape.
Take the Russell 2000 Value, for instance, the index is profitable and is trading at forward 9.2x earnings. Given how many beaten-down names are in that index, do you really think that you can’t find companies in there that could yield a much better return than paying up for S&P 500 large-cap names just because they’re safer (allegedly)?
With the recent banking crisis, rates climbing, and inflation proving to be more sticky than many hoped, perhaps you should spend your time dumpster diving in smaller names in order to get outsized returns.
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Until next time,
Paul Cerro | Cedar Grove Capital
Personal Twitter: @paulcerro
Fund Twitter: @cedargrovecm
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