Size matters

I’ve been thinking a lot about small caps these days.

This isn’t a fashion statement (I have a freakishly huge head). But rather, obviously, stocks with smallish market capitalizations. There is no shortage of click bait headlines that attempt to set the definition of what constitutes a small cap (I’ve probably written a few of them), but generally speaking we are talking about companies with market caps below $2 billion or even $5 billion. I might be tempted to push it a little past $5 billion.

It is a part of the market full of promise, and full of train wrecks. I’ve been focused on them as part of the collection of stocks I’ve been working to put together (the collection I talked about here). The idea is to find stocks that are either misunderstood, or just not widely discovered, in hopes of going on a wild ride. Not all of those rides are upward, but one or two hits go a long way towards a bunch of misses.

We hear it discussed often, but it is still amazing to stop and realize how little attention we pay to most of the market.

Consider the stats, from my friends over at GAMCO (I stand by everything I’ve ever said about the perils of managed financial advice, but I’ll still argue Mario Gabelli is the best. Be well, Dr. Love.) The numbers:

As of year-end 2023, the total stock market capitalization of the US stood at $50.8 trillion. The top 10 largest companies combined market cap was $15 trillion. That’s 29% of the entire U.S. market cap — and 31% of the S&P 500’s market cap — tied up in just 10 stocks.

The S&P 500 covers about $44.3 trillion of that total market capitalization, or 87%. Arguably, if you have an index fund you are covered there.

It is no wonder that the other $6.5 trillion or so gets ignored. Who has the time? And for that exact reason, that’s where the hunt is most interesting. (Full disclosure: Misfit Alpha has been screaming about this for as long as I have known him!)

Alas, there are a lot of losers in that mix. And few businesses with the credentials of the Magnificent Seven. Most of us are just fine buying in the index and moving on to something more important. Probably better off.

And yet, finding winners among the masses is fun! And in theory, could be very profitable. If you find them.

Which brings us back to this collection of stocks I’m compiling. I’m going to do my best to hold myself accountable, for the benefit of you and, I think, the benefit of myself as well.

In the last few weeks, I’ve picked eight companies that are down and out, and some for very good reasons. There’s a case to be made they all have a lot of potential to go up, but they are all also candidates to be forgotten about in a few years’ time. I’ve got about a dozen other stocks that I am trying to narrow down to add.

As I type, five positions are green and three are red. But one of the reds is really red. The S&P 500 is up 0.97% since the first stock was entered into the system. The collection is down 0.65%. This is obviously a long game; it is a collection of stocks that need time to prove themselves. How long is an interesting question, but I would love to see some validation from at least a couple of these companies in the quarters to come.

Is it worth it? In a world where it is so easy to just track the S&P 500 for a fraction of a penny on the dollar and gain exposure to 87% of the total market, is there really a reason to do more and beat it? The answer is, and always has been, it is when it works!

Time will tell, but I’m excited about the experiment and curious what I might be able to learn.

If you’d like to join me in this adventure, Savvy Trader has a good community section. You can find me there.

Disclaimer: Fits and Starts DOES NOT provide financial advice. All content is for informational purposes only. Stocks mentioned are as reference only, and a mention should not be interpreted as a buy or sell recommendation. The author is not a registered advisor or a broker/dealer. DO YOUR OWN HOMEWORK. The information contained within is not and should not be construed as investment advice, and does not purport to be. The red zone has always been for loading and unloading of passengers. There’s never stopping in a white zone.

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