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Why small and midcap companies for stock pickers ?

May 6th, 2009

This blog not only favors stock picking over investing in funds but also favors investments in small and mid cap companies over large caps.


Why that?


There are generally speaking better return possibilities.


If you invest in a large cap company like p.e. Siemens (mkt.cap of € 46 bil) or in McDonalds (mkt.cap of § 59 bil) it is hard to imagine that the value of the company grows significantly more than the general GDP growth, if not there is a special situation like p.e. a turnaround or a temporary crisis.

Large caps are more interesting for dividend seeking investors because in most cases they offer a stable dividend which rises every year.


But small or midcap companies (we are talking about a market capitalization of 200 mil up to 1,5 or 2bil $ or €) can double, triple or even grow bigger than that. Some investors even made 10 or 20 times their money over time!


Certainly the risk that something goes wrong is significantly higher with small and mid caps, so it is recommendend that you diversify more. I think 10 is a minimum number of stocks you should invest in.


Most institutional investors often do not look at small caps.

If an investment fund is not specialized in small and mid caps its sheer size often makes it impossible to invest in stocks under a certain market capitalization.

Most small companies are only followed by few analysts too.


So there is a compelling chance for individual investors to discover promising companies that the stock market does not accurately price. Their intrinsic value can be much higher than their actual market price.


…..buy good underfollowed small companies and wait patiently until the market discovers their real value!

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