Blue Chips impersonating small Caps
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.