What a wonderful time this is to be an enterprising value investor.
At first blush, this may seem like an odd thing to say. Despite a bounce in the first half of the fourth quarter, the Nasdaq composite is still down more than 30% in 2022 while the S&P 500 has lost nearly 20%. Consumer confidence remains lower than it was during the global financial crisis. And investors are similarly glum, with nearly $5 trillion sitting on the sidelines, weary of risk-taking.
Yet as some of the smartest historical figures have pointed out, it’s exactly in difficult times when opportunities present themselves. It’s up to investors to take notice. We believe that even in a bear market, there’s a bull emerging somewhere. And if a recession is on the horizon, there are still companies with competitive advantages that set them apart. As bottoms-up stock pickers, our job is to use this environment to add well-run businesses with unique tailwinds, when they are sufficiently undervalued.
The good news is the likelihood of finding attractively priced companies appears greater in small caps. After a historic run for giant name-brand growth stocks in recent years, small-cap’s share of total market value remains lower today than in the dotcom era of the late 1990s, as demonstrated in the chart below.