Market & Topical Perspectives

The Small Idea: Deja Moo

The Small Idea: Deja Moo

First Eagle’s Small Cap team believes small and microcap stocks represent a particularly volatile and inefficiently priced segment of the US equity market—and that these dynamics can create opportunities for disciplined active investment managers. In The Small Idea series, the team offers its perspective on some of the themes and trends impacting this large, diverse pool of domestic companies.

This edition was written by Bill Hench, head of the Small Cap team and portfolio manager.

On the right side of my desk is a copy of a proverb. It says, “Worry is like a rocking chair. It will give you something to do, but it won’t get you anywhere.” If I turn my head to the left, I see another: “Deja Moo—The feeling you’ve heard this bull before.” Both of these pearls of wisdom have resonated with me of late.

Recently, the team was asked about our current worries in the small cap space. As fundamental, bottom-up investors, the Small Cap team focuses primarily on idiosyncratic risks that, while not unique to our investment universe, are more pronounced among smaller companies. Common business risks—revenue and earnings stability, management skill and balance sheet strength, to name just a few—tend to exist on a size-based continuum. A large cap company may have a broadly diversified product line, a deep bench of talent and easy access to the capital markets, factors that all help promote operational stability and a certain degree of resilience. In contrast, a smaller company may have a narrow line of products, limited organizational depth and a high cost of capital, giving it a narrower margin for error.