information provided by The Circle of Independent Analysts •05/09/2024 at 4:39 p.m.
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The “small caps” segment has been suffering on the stock market for years: this is in any case the feeling we have when we look at “small” stocks, whose capitalization is less than €2 billion. For 5 years, the performance of the CAC Mid & Small index has been limited to 11%, vs +55% for the CAC 40. The large caps of the C40 index have grown 5 times faster than the “small caps”… This observation led us to take stock of small caps. We propose to return to the specificities of this segment of shares, to measure stock market performance in France and in Europe and then to judge their current evaluation.
Small caps: what are the specificities?
From a fundamental point of view, small caps often depend more on the domestic market than on international markets. They are thus less diversified than large groups, which can count on international markets or on the development of another sector when the domestic or main activity deteriorates.
In general, midcaps have less pricing power than large caps, which have a more global activity which allows them to better negotiate the cost of their inputs, benefiting from higher purchase volumes. For example, recently they were considered to be the first victims of rising inflation.
As they operate in niche markets, their growth is higher and concentrated than that of large groups present in multiple market segments. They also have more difficulty managing the complexity of financing methods and supply chains, particularly during the crises we have experienced recently. In a word, small caps are more risky…But their growth is greater than that of large caps, as shown in the following graph, which bases the prospective profit of the 3 STOXX indices small, mid at 100 20 years ago and wide.
Source: Factset, Phiadvisor Valquant
The average annual growth over the last 20 years has therefore been 2% higher for small caps…
Small caps: what stock market performance?
Over this long period of 20 years, the stock market performance of small caps remains higher than that of large caps: despite a major underperformance over the recent period, investment in small companies is more profitable than in large ones…but you have to be very patient!
Source: Factset, Phiadvisor Valquant
Small caps: what assessment?
As a result of higher growth, the valuation of small caps is higher than that of large caps: this is true over the very long period, but not currently.
Source: Factset, Phiadvisor Valquant
As we believe the trend will remain bullish throughout 2024, we believe this is the time to buy small caps. The choice is very wide, and in many sectors there are many particularly attractive stocks, such as, for French stocks: FIGEAC AERO, VICAT, DELTA PLUS, PRECIA, FOUTAINE PAJOT, DEKUPLE….
