Global small-cap stocks often fail to gain the attention they perhaps deserve. Their appeal is frequently either underappreciated or overlooked, especially when the dominant narrative and newsflow routinely revolves around the attractions of Big Tech behemoths with trillion-dollar market valuations. Yet small-cap performance has been strong – and not just since the Covid-19 crisis.
Smaller companies have considerably outperformed larger companies since the turn of the century. This has been driven primarily by faster revenue and earnings growth, and we expect this to continue. While it is true that small-cap stocks can be more volatile than large caps, historically investors are rewarded with higher returns.
An encouraging worldwide backdrop
We see several good years of global economic growth ahead, and we believe this will make for an attractive environment for small-cap investing. We also expect mergers and acquisitions to be another important driver for small caps. Sometimes we buy from private equity and larger companies; more often we sell our businesses to them, normally at a significant premium.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Our focus is on identifying companies with durable, sustainable business models, where we have a differentiated view and see scope for a bargain to produce strong returns. While we continue to see attractively valued companies in most parts of the world, we would caution that valuations are somewhat stretched in those stocks and sectors popular with the consensus over the last 12 months. We think the stocks below, held within the Invesco Global Smaller Companies Fund (UK), are attractively valued.
A chemicals group with the right formula
Denka (Tokyo: 4061) is a chemicals company with significant global shares in highly profitable niche areas. Spherical alumina is a good example of a high-margin product with strong growth potential as it is used for electrical insulation and heat dissipation in electric-vehicle batteries. Products for the semiconductor and healthcare industries add to the company’s long term growth outlook.
The outlook at Samsonite (Hong Kong: 1910), the well-known global luggage brand, is also auspicious. The problem it has faced recently is that when no-one travels, no-one buys much luggage. However, the brand is super-strong and its scale leads to durable advantages in procurement, distribution, and research and development. As a result, it remains the global leader and sales should bounce back with the recovery from Covid-19. It has also used the sudden-stop experience of the pandemic to reduce costs, so we think it will emerge more profitable than ever when we get back to normal.
A bright future in LED lighting
Signify (Amsterdam: LIGHT) is a global leader in LED lighting solutions. While LED lighting is a highly competitive area, Signify has remained a leader in more complex “connected LED” solutions, whereby lighting is combined with IT systems. These offer companies even greater energy savings and better margins. There is ample scope for growth in this sector as we aim for a zero-carbon future and benefit from infrastructure stimulus packages around the world. Furthermore, Signify’s recent acquisition of Cooper in the US allows them to improve margins significantly in its corporate division.
-
Investing in a dangerous world: key takeaways from the MoneyWeek SummitIf you couldn’t get a ticket to MoneyWeek’s summit, here’s an overview of what you missed
-
DCC: a top-notch company going cheapDCC has a stellar long-term record and promising prospects. It has been unfairly marked down
-
Three British small cap bargains to boost profitabilityThree British small caps to invest in, according to Edward Wielechowski of the Odyssean Investment Trust
-
How investors can use options to navigate a turbulent worldExplainer Options can be a useful solution for investors to protect and grow their wealth in volatile times.
-
Invest in Hilton Foods: a tasty UK food supplierHilton Foods is a keenly priced opportunity in an unglamorous sector
-
HSBC stocks jump – is its cost-cutting plan already paying off?HSBC's reorganisation has left questions unanswered, but otherwise the banking sector is in robust health
-
Lock in an 11% yield with SabreTips Sabre, a best-in-class company is undervalued due to low profits in the motor insurance industry. Should you invest?
-
James Halstead is a family firm going cheap but should you buy?James Halstead will rebound from a weak patch, while tax changes would be a buying opportunity
