Wise-Owl
3 September 2018
Understanding small and mid-caps with Wise-Owl
Wise-Owl
Simon Herrmann – Investment Analyst at Wise-Owl.com, AFSL 246670
Small and mid-cap stocks have outperformed their larger counterparts over the past year amid rising investor appetite for growth opportunities.
In Australia, the S&P/ASX Small Ordinaries index (XSO) – which tracks the mid-cap component of the market, excluding the largest 100 companies – is up 21% over the past 12 months, compared to a 5% rise for the widely quoted S&P/ASX 200 index (XJO). (Source: IRESS Market Data)
The Russell 2000 Index - which tracks U.S. small capitalisation companies – is trading near all-time highs, significantly outperforming the S&P 500 index of the largest 500 companies. The index of small caps has gained approximately 20% over the past 12 months compared to a gain of approximately 12% for the S&P 500. (Source: IRESS Market Data)
As small and mid-caps are often at the start of their lifecycle as a business, these companies offer investors the opportunity to participate in potential growth, as the companies begin to increase their operations at scale and achieve economic goals.
The risk for investors in considering small and mid-cap companies surrounds the ability for these companies to sustainably grow into a mature business without succumbing to roadblocks in their expansion, or accumulating excessive debt that restricts growth in the long term.
The investable universe of small and mid-caps is large and can provide opportunities across multiple sectors and industries which allows for the ability for investors to diversify their portfolio and reduce concentration risk.
When examining a small or mid-cap opportunity, some potential questions you may want to ask as an investor as part of your evaluation process are:
- Management – Does the company’s management team have a track record of value creation and interest in the company? Are there founders of the company still involved in running day-to-day operations?
- Financials – Does the company have a sustainable level of debt and sufficient cash in order to continue to grow in the short-to-medium term?
- Exposure to growth – Is the company set up to capitalise on emerging trends or involved in an industry that is growing?
- Share register - Are there large holders of shares who are prepared to commit long term to the company’s future?
These questions may prove useful in guiding your investing journey encountering small and mid-cap companies. However, please ensure you comprehensively research all potential opportunities before acting.
Information presented in this article is not advice and has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. Any prices or securities used in the examples in this presentation are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to the individual's objectives, financial or taxation situation and needs, and, if necessary, seek appropriate professional advice. The article is written by external companies that are not a member of the Commonwealth Bank of Australia Group of Companies (the CBA Group) does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. The CBA Group does not accept any liability for losses or damage arising from any reliance on external companies and their products, services and material.
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Information presented in this article is not advice and has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. Any prices or securities used in the examples in this presentation are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to the individual's objectives, financial or taxation situation and needs, and, if necessary, seek appropriate professional advice. The article is written by external companies that are not a member of the Commonwealth Bank of Australia Group of Companies (the CBA Group) does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. The CBA Group does not accept any liability for losses or damage arising from any reliance on external companies and their products, services and material.
Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group & Chi-X Australia. Both entities are incorporated in Australia with limited liability.