ILLUSTRATION. Peter Lynch and small cap stocks that give big returns
Reporter: Novice Laoli | Editor: Novice Laoli
KONTAN.CO.ID – JAKARTA. Some investors may routinely ignore small companies when managing their portfolios for a variety of reasons, including unfamiliarity with their products compared to large companies or the perception that the risk-return ratio of small companies is less favorable than that of large-cap stocks.
However, small cap stocks can offer long-term investment potential for several reasons. Indeed, small company shares can be missed by investment professionals as well as private investors.
Launch Guru Focus, Friday (17/12). This could mean a lack of research coverage on their past financial performance and future prospects.
As a result of this, stock prices may not accurately represent the company’s views. This can mean a wider margin of safety can, at times, be offered.
In addition, a smaller company can offer stronger growth prospects than the stock of a larger, larger company.
By definition, their operations are smaller in size and scale. This could mean there is a greater opportunity for growth compared to a business that has gone through a fast-growing phase.
In addition, some small companies may be younger than their more established and larger counterparts. Their lack of maturity may mean they have greater scope to expand into new territories and new product segments.
Peter Lynch has had a long career investing in small companies. He provided a 29% annual return between 1977 and 1990 while managing the Magellan Fund.
Lynch has previously commented on the attractiveness of small cap stocks. He said, “Big companies have small steps, small companies have big steps.”
While Lynch’s point of view has its advantages, smaller companies can present higher risk than larger ones. For example, their financial prospects may be less resilient because of reliance on a smaller customer group or because they operate in a more limited geographic area.
Similarly, they may have a weaker financial position due to their smaller size. This could mean they find it harder to cope with periods of weaker operating conditions that do not affect their larger rivals to the same degree.