This month we saw a chart showing that the global discount of small and mid-cap companies to large caps is at a 20-year high, coinciding with the sharp rise in large-cap technology companies, banks, leisure and tourism, and the retail sector, among others. One only has to take a look at the evolution of the stock market indexes that group together smaller capitalization companies to realize how far behind they have lagged in recent quarters.
We are aware that investment themes are changeable and that, on many occasions, they show very pendular and unpredictable movements, but we have also found that, on almost all occasions, moving in the opposite direction to the market is rewarded. In our view, we are in one of those moments right now, and we believe that investing in smaller-cap companies is a great opportunity.
It is true that in an environment such as the current one, in which economies are showing anemic growth at best, and with interest rates that have experienced the highest rate of increase in developed economies in the last 50 years, it is not the most favorable for investment in companies of this profile. But it is also true that, in our opinion, much of the above is already priced in.
However, focusing on smaller-cap Spanish companies, it should be noted that there are currently a number of handicaps that both investors and companies have to face:
- Lack of demand. In recent years, the assets of investment funds operating in the Spanish market have declined significantly or many vehicles have been liquidated outright.
- The need to be more patient with investments since, in our perception, it takes longer for the value of companies to emerge on the stock market. In recent years, for reasons that we will not go into here, many analysis teams and some management teams have disappeared from the market, with the result that coverage of smaller listed companies has plummeted. There are now many companies that are "orphaned" by analysis and therefore lack visibility.
- This has had an impact on the trading volumes of listed companies (already low) and here we enter a circle of difficult exit, as there are managers who impose themselves not to invest in companies trading less than one million euros per day.
- Need to take better care of the shareholder. Beyond the legal requirements, in our view, a company that goes public must be attentive to the shareholders/partners of the company, must offer a minimum of accessibility to the company's management teams and, above all, transparency.
- The new ESG environment in which we move has not helped much to smaller capitalization companies that, even meeting the minimum criteria required in this area, are off the radar of many of the companies that have emerged in recent years and that are dedicated to analyze and give the approval for a company to be considered "investable" under ESG parameters.
In our view, companies should take a more proactive role in seeking/maintaining investors. As we have mentioned, the lack of the coverage and demand that was available to them years ago forces them to do so.
Also, the possibility of applying tax benefits could be considered, as is already done in countries such as Italy or France, for those investors who invest, for a certain period of time, in Spanish companies.
However,as Camilo José Cela once said, "he who resists, wins" and we sincerely believe that we are in this scenario right now, even if we have to resist a little more than usual. There are a good number of companies trading at rock-bottom prices, with high revaluation potentials (in some cases the highest in many years), in which venture capital, which has high levels of funds to invest, is beginning to show its "paw" and some companies are even taking the opportunity to carry out partial takeover bids on their own shares.