Small cap equities and international equities are generally good places for investors to begin their work of finding undervalued companies.
In this age of ultra-low interest rates and overvalued assets it makes sense for public company investors to look for value in areas of the market that receive less investor attention than sectors that garner too much attention. Large Cap Technology for example offers little potential for outsized gains in our view given current valuations and given the fact that half of the world owns names such as Apple, Amazon and Microsoft.
Small Cap equities are generally less followed by sellside analysts and often fly under the radar. I used to make a living covering small cap technology stocks, many of which today are large cap stocks (Ansys, Advent (now SS&C) and CoStar Group come to mind). It is possible to find small cap technology companies that are led by outstanding management teams and that have built competitive moats around unique product sets. Small cap names often take a bit more work to get to know. Meeting with management teams is a great place to start as it relates to performing your due diligence. A strong CEO will be able to articulate for you his/her strategic thinking around the company’s product portfolio, his/her operating style and approach to execution, how he/she creates incentives to drive innovation, operational excellence and more.
International equities are perhaps even more fertile ground for finding new investment ideas as international markets are less well picked over by U.S. investors simply because it is more difficult to perform due diligence on international companies. There is at least one reader of this letter that travels to Asia from the U.S. to visit companies he is interested in, but that in-person due diligence which is so critical is increasingly rare. Happy hunting.