Celebrating 10 Years of Small-Cap Investing
With the August 2022 issue, the SmallCap Informer newsletter celebrates its tenth anniversary.
In the last decade, securities markets and economies worldwide have experienced significant shocks, but our newsletter has been unwavering in its coverage of smaller companies to aid individual investors in diversifying their equity portfolios.
In this time, the SmallCap Informer has published 120 issues with 240 “focus stock” recommendations. We do re-recommend companies when their fundamentals and valuation suggest that they are among the best available opportunities, so in total have covered 164 different companies. That is a lot of stock and industry research, though we attempt to limit our coverage list to roughly 50 companies at any time.
Not including the focus stocks in this issue, 52 companies have been recommended in the newsletter a total of 102 times. Of these, 66 (64.7%) are currently in the green, while 36 (35.2%) are in the red. While it is not always possible to know the precise reasons why demand for any company is weak (or strong), the present bear market is certainly a contributing factor for the price declines of many of the stocks currently in the loss column, and we can reasonably expect future gains when the market rebounds.
Of the total coverage list, perhaps just three of the underperformers are on a close watch for necessary improvements if they are to continue being covered, but the rest are considered reasonable buys for those with patience and willingness to wait for economic recovery to arrive.
On the sell side, we have completely closed out 138 recommendations of 112 different companies. Of those, 63 (45.7%) were closed at a net gain, while 75 (54.3%) were closed at a loss.
(You can see the record of all sold stocks in the new Closed Positions Report in the Subscribers area of the SmallCap Informer website.)
Of the sold stocks, four positions, in five companies, were closed due to announced acquisitions, all but one with realized gains.
Since being discontinued from coverage, an additional 31 companies have been acquired or otherwise no longer actively trade on U.S. markets. Often, the fundamental failures of the management of these businesses caused their stocks’ prices to decline to valuation levels where acquirers would eagerly jump in with a purchase offer. While this circumstance can provide an attractive exit for subscribers who continued to hold after our sell recommendation, these special situations are outside the purview of our strategy and we stand by our decisions to sell.
The average realized gain from all closed positions comes out even, with gains slightly outpacing losses by just 0.03%. This is largely due to our approach of letting the winners ride and getting rid of the underperformers. (To be honest, we would like to be doing a better job of pruning the losers more quickly.) Still, more than two-thirds of the stocks we have recommended for sale have since underperformed the broader market, suggesting that our decisions to discontinue coverage were correct.
Of course, looking at performance requires including an element of time and the magnitude of gains or losses, and the above statistics do not consider holding periods or the performance of the rest of the market during the same timeframes.
For this, we compare the compound annualized rate of return of all buy and sell picks to our designated market index, the S&P SmallCap 600. We use the closing price of each stock on the next trading day following the publication of an issue to record a purchase in an equal amount (or sale) of a stock, and then record each dividend during the holding period. We replicate these cashflows in buys and sells of our target index, and then compute the average annualized rate of return for each. This provides an apples-to-apples comparison of how the SCI picks compare to an investment in an index fund or ETF that tracks the underlying index.
This measurement is purely hypothetical, to be sure, as we do not expect (nor recommend) that subscribers buy every stock featured in the newsletter, but we believe that it captures the performance of our approach in the aggregate.
The track record graph on the website shows our lifetime performance compared to the small-cap index, a record of which we are quite pleased.
In this issue, we revisit a company that has been featured in the past but that offers good prospects for coming economic hard times.
Our second selection is new to the SmallCap Informer, but not new to our internal watch list. Its recent price declines (along with many other fine companies in this bear market) make it most attractive to long-term focused investors.
I appreciated seeing many of you at the recent BetterInvesting National Convention in Dallas and at a recent virtual AAII chapter event in North Carolina, as well as at our mid-year subscribers webinar. Check the website for my upcoming event schedule, for both virtual and in-person appearances.
I am grateful to all subscribers for your feedback and support, and wish you the best for continued profits for the rest of 2022 and beyond.
And as always, stay the course!
- DOUGLAS GERLACH
Reprinted from the August 2022 issue of the SmallCap Informer.
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