Thanks Jims, Kory, Bleeker, Todd, etc. for your thoughts. My replies to you:
At the risk of belaboring the obvious, gotta hand it to SI and the thread. Where else could you get this kind of deliberation among far-flung participants inside of 12 hours. Would still welcome comments from countries not heard from.
Todd,
...I am not going to change my investing habits or recommendations to follow some greater-fool theory herd.
Of course not. On the contrary, to the degree that this thinking becomes conventional wisdom (as it largely already has, IMHO, albeit for somewhat less articulate reasons than in the piece), it's a reason for a mid- to long-term investor to take a contrarian stance and pick the smaller, high growth stocks.
At some point, the overpriced big stocks will be too pricey, and a long period of underperformance will ensue. There may not be any sizeable pullback or bear market, but the small stocks will catch up nicely.
Exactly. And timing that point in advance will be impossible. Since we know that right now, quality small-cap companies generally (not to mention stellar fundamental performers like THQI) are trading at bargain-basement prices, the small stock strategy seems the least risky and by far the more promising for all but the shortest-term investors (especially with some diversification.)
Your two scenarios for sudden small cap outperformance seem right to me, and especially applicable in THQ's case.
Declining operating margins? That's a poor reason for underperformance. Obviously, if a company has declining margins, it shouldn't be purchased. That's no mystery.
Eh? I'm confused here. Obviously, this isn't THQ's problem, as you document. But what do you mean by "it's a poor reason for underperformance?"
Maybe it IS different this time. So if/when the market stops going up, the money will shift into the undervalued small stocks, and the big caps will have a well-deserved bear market.
I would love to see this happen, but see little reason why it might. (One possible impetus: the growing presence of do-it-yourself, little guy investors, combined with the mushrooming category of smaller hedge funds. Institutions dwarf them in size, but their $ could have a disporportionate impact in smaller cap names.)
Besides, most institutional money is in the big stocks, so how much damage could a institutional panic cause? A long, protracted period of market weakness (rather than a sharp correction) is likely to help small caps, relative to big stocks. But a correction causes the fearful institutions to cling to their big-cap (security) blankies.
Agree with this 100%.
Thanks for the interesting artice. Remember that the prevailing practice or behavior is not always indicative of the smart thing to do. And in time, the value of a company will come through, and THQI will get the valuation it deserves.
You're more than welcome--thanks much for your comments. I did not mean to imply that I was looking for reassurance. Indeed, as a contrarian, I think that in fact "prevailing practice or behavior" is more often than not indicative of the wrong thing to do. I am 100% in small cap names, and have no intention of changing this in the forseeable future. And THQ remains my largest holding, despite tempting bargains galore in the small-cap arena, because I think even in the high 20s its risk/reward ratio is unsurpassed.
Kory: I liked your property analogy. Seems apt.
Jim F:
In the past, small cap stocks have suffered the most in market declines. This is because they have historically traded at higher multiples. This market is upside down.
Without question. This was the case even before 98. With R2000 virtually flat and S&P up significantly in 98, it's even more true now.
At some point (possibly now), we will enter a protracted period during which money will shift from liquid stocks to growth/value stocks.
I think this probably won't happen right away (though who knows.) But all that needs to happen for small caps to begin dramatically outperforming big caps is for the prevailing trend to stop, not reverse. Small cap earnings growth has been better for some time now, after all. And even if it only stopped (and history argues it will indeed reverse sharply at some point), small caps would have MUCH less downside and MUCH more upside than their big-cap bretheren.
Bleeker:
I also thought the small cap story was very good. But I'm not sure if it applies to THQ all that much. According to Bloomberg, THQ now has 25%+ institutional sponsorship: Furman Selz was the largest holder with more than 11% of the shares in early May if I recall correctly. And they were buyers around the WWF announcement so their position may have actually increased. Also, the Russell 2000 is almost flat year-to-date whereas THQ is up around 25% year-to-date.
Two points here. First, though THQ is up 25%, its trailing P/E has dropped significantly in 98 (as you have eloquently articulated before.) Second, one other reason THQ may not have the problems that some small caps do is that it's volume is unusually good, making it more liquid (albeit more volitile too) than most in its size range.
Thanks again, everyone. I remain heartily convinced of the virtues of a carefully chosen, a modestly diversified, high-growth, small-cap portfolio strategy for individual investors with a moderate to long term time frame. |
