Assessing the Price and Valuation of Small-Capitalization Companies

The stock prices of small-capitalization companies have been disproportionately affected by recent market activity relating to the COVID-19 pandemic, as funds tracking smaller companies are down more than the broad market.  As this WSJ article notes, “the benchmark S&P 500 is down 28% from its Feb. 19 record close, while the Russell 2000 small-cap index has lost 35% over the same period.”

Much of this outsize downward pressure may be justified by the smaller companies’ debt levels and questionable ability to navigate an extended or even moderate downturn in economic activity and customer patronage.  However, a divergence this drastic provides investors with the opportunity to assess whether a specific asset class has become relatively cheap for reasons not driven by intrinsic value based on discounted future expected cash flows.

For instance, if the stock prices of smaller companies are being punished because their trading volume does not provide as much liquidity as that of large-cap companies, this may be a good opportunity to add select small-cap companies to their portfolios at a discounted price.

Read More from the WSJ here: https://www.wsj.com/articles/small-caps-eviscerated-in-stock-market-rout-11585134001?shareToken=st7005a7b50be546dbb50d54cce640a7aa