25 July 2013

A Good Small / Mid Cap Stock Would Emerge As Large Cap Stock Eventually

We always heard from others that it is a good and safer bet to invest in Blue Chip counters which have a large market value as they contributed large revenue and profits, which give investors a sense that it would standstill during the bear market.

There are a lot of examples of large capital stocks emerged from good mid cap counters, such as Wilmar, First Resources and Noble etc. As you can see, a large market value companies normally have faster growth in its revenue and net profits in earlier stage before staying in a more stable range of growth, say 5% - 10% per year. As the revenue grow to certain level, it is harder for the giant counter to grow compared to its smaller peers, unless they can create a new market for more consumers or acquire smaller firms to have better strength in Economy of Scales. 

In fact, I prefer small/medium capital companies to large capital companies when I try to construct my own portfolio. The reasons are listed as below:

  1. Enjoy lower PE compared to higher PE. PE in another way means the number of years for investors to receive their invested capital given current EPS. For example, if the PE is 5, it means that it takes 5 years for the investors to "receive" the invested capital. However please be reminded that above formula is just for guessing purpose as we still have to take into consideration of other factors such as the business risk & credit risk of the companies. It may not true if the current EPS is not sustainable, and investors may end up getting nothing if the companies does not distribute excess earnings as dividend to investors. 
  2. Enjoy Potential Faster Growth. It could be true if the small/mid market cap counters are in its niche industry, with lesser competitors and higher growth potential. Example 1: Ezion establishes its leadership in jack up rig servicing (lifeboat) in South East Asia / Asia region and still expanding. Example 2:  First Resources is in expansion of its land banks with about 10% compound annual growth rate in total cultivated area.
With 2 reasons above, I believe it is always a good move for us to invest in good small / mid cap stocks to enjoy better potential return, which could mean higher volatility price risk. 

Nonetheless, we should study more in the company policy, such as the corporate governance, business model, financial risk as well as business risk before we become minor shareholders.

1 comment:

  1. You can earn an ample amount of profit by investing in the mid cap stocks. Invest in the mid cap stocks to maximize your capital.


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