Wednesday, May 26, 2010

Small-Caps Rock

Our regular readers have undoubtedly noticed that we have a tendency to discuss small cap stocks quite a bit on this site. Why? Because among the small cap universe some of the most inefficiently priced stocks can be found. They carry little in the way of name recognition for retail investors, and they don't move the dial enough for institutional investors (their budget calculators show that the returns just aren't worth it).

As such, for those who can read/interpret/understand financial statements, small cap stocks offer up some great opportunities. As Charlie Munger stated at the Wesco Financial meeting a few weeks ago:

"Don't go after large areas. Don't try to figure out if Merck's pipeline is better than Pfizer's. It's too hard. Go to where there are market inefficiencies. You need an edge. To succeed, you need to go where the competition is low. That's the best advice I can give to small investors."

But while we've discussed stock investment research sources for individual investors, most of these sources are focused on large caps, as that's where the web traffic's at. One site, however, is devoted entirely to small caps: Agoracom is a site dedicated to providing information and promoting discussion of small cap stocks.

There is one caveat, however. Its business model derives revenue not from advertising, but from the small cap companies themselves. Many small caps struggle to get their names out there to investors, and so they are willing to pay Agoracom to discuss their companies. As such, it is unlikely you will find much in the way of negative information. Nevertheless, investors looking for info on small caps can find discussion forums, filings, quick facts and other useful information that could eventually lead to an investment decision.

If you use or have useful sources for small cap investing, please feel free to share them with others of like mind in the comments section below.


Ankit Gupta said...

I agree with this on the whole, however I don't think investors should limit themselves to this alone - I prefer to just go where the value is. If I find a wildly mispriced larger cap stock, I have no issue going for that, even in areas that Buffett historical avoids - technology is one example.

When Apple fell to $80, you could look at it, discuss why their revenue recognition according to GAAP understated actual revenue, how the price of the stock isn't factoring in certain developments, etc. Gamestop has been another example in recent times, although we've seen it drop below intrinsic value once again.

I prefer investors will to shift their focus to wherever they find value - labeling an investment fund as small/mid/large cap and based on value/growth/blend is too narrow in my opinion. It makes much more sense to just follow value even if it leads you to distressed debt, bankruptcies, whatever it may be.

Anonymous said...

Saj, when you research a stock, do you go to message boards and read what people are saying about the company? I like going to the message boards on Yahoo Finance to get the perspective of the bears, plus there's a bit on entertainment value when the bulls call them names.

Lucas said...

The Wesco Financial Shareholder's Meeting was extremely enlightening. Being the nerd I am, it's easily the most fun I've had in the last year. And it's in beautiful Pasadena.

Anonymous said...

investment message boards are singularly the least informative, most misleading, and crudest aids for information you could ever find. One can make a weak rebuttal in that they provide some marginal informational value, or offer "perspectives," but the harm they cause in the form of giving a forum to people with vested interests far outweighs any marginal benefit.

I'm a little surprised to see "discussion boards" advocated on this site, since this site has made a good amount of sense so far. Its sad to see this blog devolve from the author's own neutral or disclosed coverage of stocks, to chapter-reviews from books, to sponsored articles by companies with vested interests, to advocation of "discussion boards."

I am a half step away from unsubscribing

Saj Karsan said...

Hi Anon1,

I'd have to agree with Anon2 that I find most discussion forums (including the Yahoo! boards you cite) rather useless. However, there are some forums where like-minded investors can share ideas. For example, oldschoolvalue provides a forum where a few decent ideas have been tossed about by value investors.

Hi Anon2,

Sponsored posts wouldn't be required if the consumers of the information on this site paid for the "free" info they were receiving. Unfortunately, they will not; so to keep the info flowing, advertising is required to make it worthwhile for the content provider (just like it is for the television industry). Posts that are not written by me or are not my opinion are clearly disclosed as such, so readers are free to ignore them.

Anonymous said...

I appreciate you posting my comment on here, it reflects well on your professionalism in this non-professional volunteer endeavor.

I will certainly continue to read your blog, but will have to now "look out" for whether the source of information is you or your sponsors because the sponsored ads "look and feel" like your input.