Blue Chips im­per­son­at­ing small Caps

Forbes - - Investing -

So what do you like? Small caps? Big caps? It’s of­ten one of the frst things asked by some­body try­ing to fnd out what kind of in­vestor you are. And since the iconic June 1992 Jour­nal of Fi­nance pa­per, “The Cross-sec­tion of Ex­pected Stock Re­turns,” by Eu­gene Fama and Ken­neth French, the size fac­tor (the “small-cap” efect) has moved be­yond pop­u­lar dis­cus­sion into the quant main­stream.

Whether small caps beat big caps de­pends on when you look. What’s deeper, though, are fun­da­men­tal dif­fer­ences be­tween small and large caps that ma­te­ri­ally afect re­ward-risk trade­ofs. Smaller com­pa­nies are stereo­typ­i­cally less bu­reau­cratic and less op­er­a­tionally di­ver­sifed. Also, smaller stocks tend to be less in­ten­sively cov­ered, mean­ing there’s more op­por­tu­nity for de­vel­op­ments to take in­vestors by sur­prise, for bet­ter or worse.

Th­ese are stereo­types, not rules or clas­sif­ca­tions, and we can fnd in­di­vid­ual ex­am­ples that don’t fully ft the bill. That opens up an op­por­tu­nity for us to try to get the best of both worlds: blue-chip stocks (in­cluded in the S&P 500) that are well-es­tab­lished busi­nesses and have the abil­ity to with­stand trou­ble but that also ofer some of what in­vestors “man­age­ment’s long-run­ning prac­tice of let­ting the frm’s industry-lead­ing per­for­mance speak for it­self.” For­tu­nately, this blue-chip, as­set­free freight for­warder also imitates qual­i­ties that many like in small caps: industry-beat­ing growth rates. The com­pany’s am­ple sur­plus cash is be­ing used not only for a mod­est div­i­dend (which grew at a rate of 11% over the past fve years) but also for share buy­backs.

Large-cap ap­parel com­pany has looked a bit smallish in its own­er­ship of the Calvin Klein brand, which it ac­quired in 2003. The ini­tial deal left con­trol of ma­jor por­tions of the brand ( jeans and un­der­wear) in the hands of War­naco. In early 2013 PVH ac­quired the lat­ter, bring­ing every­thing in-house. It took some time to in­te­grate all the op­er­a­tions. But now PVH is well po­si­tioned to trans­late its larger brand port­fo­lio (in­clud­ing Tommy Hil­fger) into proftable growth. I ex­pect this large cap, which has mas­quer­aded as small, to step up and act its size.

Per­haps the most en­tic­ing as­pect of small caps, es­pe­cially those in tech, is the prospect of growth through emerg­ing prod­uct lines.

the now well-en­trenched elec­tronic se­cu­ri­ties mar­ket, is stretch­ing into such ar­eas as data sales; in­dex li­cens­ing for ETFS and struc­tured prod­ucts; and in­vestor re­la­tions, pub­lic re­la­tions and cor­po­rate gov­er­nance ser­vices. Nas­daq Pri­vate Mar­ket is a par­tic­u­larly in­trigu­ing ven­ture through which Nas­daq as­sists pri­vate com­pa­nies in man­ag­ing their eq­ui­ties (hold­ers, rights, op­tion ex­er­cise, etc.). It’s also div­ing in to blockchain tech­nol­ogy in an efort to make a mar­ket in fu­ture uni­corns.

is a player in a very hot area, data se­cu­rity, which is pro­vided through man­age­ment of trafc that passes be­tween users, ap­pli­ca­tions and data cen­ters. Hack­ing ac­tiv­ity alone makes this a growth busi­ness. For FFIV, prospects are en­hanced by new ofer­ings that ad­dress cus­tomer needs for fex­i­bil­ity and vir­tu­al­iza­tion via the cloud.

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