Does Size Matter?

The short answer is yes and no, but first let’s define what I mean by size first. Market capitalization (also known as market cap) is the total market value of a company. It is found by multiplying a company’s current stock price by the total number of shares outstanding. Don’t worry, you’ll never have to calculate it yourself. Financial websites such as QuickFS.net, Morningstar.com and Google Finance display it for free.

 

A company’s stock price can be found on the financial websites above by entering the stock’s ticker symbol. A company’s shares outstanding can be found on the first page of the annual or quarterly report and most financial sites publish it for free.

 

NKE Stock Price = $74.85

Shares Outstanding = 1,201,462,000

Market Cap = $112,167,043,129 or simplified $112.17 Billion

 

$112.17B doesn’t mean much until we put it in context. To do that we can use Market Cap Classifications such as:

Looks like Nike fits nicely into the Large-Cap classification. Now, let’s take a look at Nike’s competition for comparison.

Skechers has a market cap of 9.9B making it a Mid-cap. Wolverine would be a Small-cap at 1.2B. Allbirds is a Micro-cap coming in at just 98M.

 

Nike is obviously the biggest fish in the pond (probably should be in the ocean) by a long shot, so we know that smaller competitors will have a difficult time competing with Nike in the marketplace. Nike has a strong brand name, massive financial resources to allocate to research and development and deep pockets to pay top athletes to wear its gear. Even though Skechers is a much smaller company than Nike, they have more growth opportunities. Skechers has been growing its sales at 16.06% over the last ten years compared to Nike at 6.5%. Nike is a more mature company with fewer growth opportunities whereas Skechers is still in the growth stages. Large-caps play the role of a steady investment in a portfolio. Since they have limited growth opportunities they tend to pay a dividend to make their stock more attractive to investors. The mid-caps are decent size companies that still have growth opportunities ahead. Skechers doesn’t pay a dividend so they can invest in their business and expand into new markets.

 

I realize Wolverine and Allbirds aren’t the best comparisons in this market, but I wanted to show examples of smaller capitalization stocks. Small and micro-cap companies can be a little more risky because they don’t have the financial resources of the larger companies, but they have massive growth prospects. Identifying high quality small and mid-cap companies can be very rewarding because they can grow rapidly and may be swallowed up by a larger fish.

 

Speaking of fishing stories. A year ago I was trolling through the small-cap pond looking for interesting companies to buy. I reeled in a few companies only to throw them back because I didn’t like their financials, they had too much debt, or they were simply too hard to understand. I came across a company named Chuy’s. I liked the name. It was a Mexican restaurant chain based in Austin, Texas. I was interested because I like Mexican food and it’s growing in popularity. The financials were very steady. Its ROIC (Return on Invested Capital) over 10 years was only 7% (I like to see 15%), but it is the restaurant business. No debt and $68 million in cash! I like it. I pulled the latest annual report to learn more. 

 

Each restaurant had its own unique look and feel, very cool. They make all their food and drinks from scratch. The CEO took the time to write a letter (bonus points for that). I liked that he was focused on the importance of his team in providing a unique dining experience. He was honest and mentioned some of the challenges they are facing. Good job Steven Hislop! 

 

I really liked what I saw, but I never bought the company and guess what happened?

A Morningstar update arrived in my inbox with the headline, “Darden to Acquire Chuy's.” The fish that got away story. Darden is the parent company of Olive Garden and has a market cap of $17B while Chuy’s was just $430M prior to the announcement. Chuy’s stock price jumped from $25 to $37.50; that’s a nice payday (assuming the deal closes)!

 

Last summer Darden acquired Ruth’s Chris Steak House. This summer they went for some Tex-Mex at Chuy's. Next summer they will buy… my money is on The Cheesecake Factory. It’s a little bigger ($1.9B) than Darden typically goes after. Who knows, maybe they’ll have a bigger appetite or develop a sweet tooth and go for a slice of CAKE.

 

Back to the original question. Does size matter? Yes, it matters a whole lot to Warren Buffett because he has billions of dollars to put to work (over $180B). When Warren buys a stock it has to be a very large company or his buying activity will drive the stock price up. In fact, his last purchase was Chubb (CB), an insurance company. Warren loves insurance companies. Not my cup of tea. He bought over 25 million shares and it took him three quarters to complete his purchase. This means he’s limited to the large-cap and mega-cap universe of stocks. His investing universe gets even smaller when he starts applying all his filters such as a business he can understand, solid financials, high ROIC, low to no debt, quality management, and fair price.

 

As for you and I, we don’t have size restrictions. We are free to fish in any pond or ocean we like. This gives us retail investors an advantage over large investors because we have more high quality businesses available to us. Since the big investors can't fish in these ponds, we have a greater chance of finding a great business that’s been mis-priced. We don’t need to worry about driving the stock price up and not getting a full position. Chances are no one will ever know you bought something. We can also let the big investors and Warren Buffett’s do all the research and buy what they buy (after doing our own homework of course). I'll show you how to find out what some of the greatest investors in the world are buying in an upcoming issue. Being a small investor sure has its perks!

I apologize. I missed the mega-caps. Companies with market caps over $200B

 

Apple was the first company to cross the trillion dollar market-cap barrier. At the time of publication five other companies joined the trillion dollar market-cap club. Here are the first three companies. Can you guess the other three?

 

This week I have my eye on a company I’d like to buy for the Itty Bitty Account. It’s a high quality business that took a little fall after reporting earnings. Unfortunately, I don’t have enough cash in the account to make the purchase. I’ll have to save up and wait until next week to buy the business. Hopefully it’s still trading around this price or better when the funds hit my account.

 

In the mean time, I built a tracker for the Itty Bitty portfolio so you can follow along. Click the button below to view the portfolio and other free stuff. 

Feel free to make a copy of the tracker and create your own Itty Bitty Portfolio and fill it with the companies you love.

 

Have a great weekend!      

 

Brian