mercredi 19 août 2015

small caps VS LARGE CAPS

Before, a great company was, for me, a company with a big name. A blue chip.

Then, a great company became a company that had a great track record (rear view mirror).

Then, I became intelligent like those apes at the beginning of 2001: A Space Odissey. I learned how to break something with a bone. A great company was now a company that satisfied a check list: high ROE, good growth, little debt, low beta, etc...

Around the time I became intelligent, I heard about the performance of small caps VS large caps. I've read a lot of times that small caps performed better than large caps.

Then, very recently (today), I've realised that it wasn't true at all. I've got a lot of examples of small caps that did well for a little while and then came with very disappointing earnings because of bad decisions, problems with integration of a business recently bought or simply the fact that managing growth is a challenge not so easy to achieve. I've got much more examples of small caps turning bad than examples of small caps turning well.

In fact, I'd almost recommend anybody to sell half of their position in a small cap if they got a 50% yield or above in a short period (less than a year). Otherwise, the odds are high that the stock price will go down and you'll lose a good chunk of your profit. For those familiar with canadian stocks, it happened with Biosyent, Cipher, Delphi Energy, Autocanada, Badger Daylighting, Rifco, Avigilon, and all those on the venture that I've written about before.

Many would say that it's easier for a small cap to grow than for a large cap. It seems true at first glance, but I think that it's easier to grow constantly for a middle or large cap than for a small cap. Small caps are less constant for sure. I haven't got any fucking universitary research on hand to say those things, sadly.

You've got some pretty aggresive medium and large cap stocks out there like Valeant, Gilead and Allergan. You've got Apple and Constellation Software. You've got O'Reilly (pretty expensive however). Please note that the guys at Sequoia once said that they prefered middle cap stocks because the results were usually the best with them.

I take a look at all my small caps holdings and the small caps I've owned before and it's not there that I've made most of my money. So, if you give me the choice between Valeant (VRX) and Biosyent (RX.V), I wouldn't hesitate a second to choose Valeant.

3 commentaires:

  1. Agreed. In January I made my first move in small caps and bought CXR, RX, PHM, and NHC based on Campbell and Donville recommendations. Sold 50% of PHM at $1.70 and the rest at $1.20 and $0.96 when Dalsin sold. About a month ago sold CPH and RX at a 30-40% loss. Basically a wash. CXR is the only one I still hold and is up 40%. I'm done with small caps. I've done better focusing on buying solid companies like ATD.B, CSU, VRX, AGN, MA, GIB, etc. that I know will return 15-25% / year than swinging for the fences with a small cap. It is also a lot easier to follow an established company, ride out the volatility, and buy on dips than betting on a small cap.

    Great blog.

  2. Agreed too... Best performers are typically small or mid-cap...

    VRX , GIB.a, ATD.B-T- (acquired as mid-ocap), ORLY, CSU, OZRK, CXR, MHK, SJ, BYD.un & RCH... were better than big large caps... My best performer is ORLY a 7 bagger... best big cap is my initial stake in WFC a 5 bagger purchased in 2008 below $10...