"smaller cap" vs "larger cap&quot

Investment Analysis Clubs Saul’s Investing Discussions
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It’s been discussed some on the board (and in the Knowledge sections) but might be worth another reminder as we approach Amazon Prime day tomorrow, which likely kicks off the holiday shopping season, and likely a significant revenue influx for AMZN.

I explained the following to a friend that was having a hard time selling some companies that he’s held for some time, really good companies, that have grown to very large cap companies e.g. AMZN ($1.7T), NFLX ($238B - he’s owned NFLX since 2011!!)

My suggestion was to consider selling the extremely large caps companies (that are still doing well, but slower growing) and reinvest in faster growing companies that have smaller capitalizations, which are also doing well, growing revenue faster, and have a better chance of growing share price faster, e.g. DDOG($34B), CRWD($32B), ZM ($140B). It’s the ‘ole’ large number problems: it’s harder for a very large cap company to realize the gains we desire than it is for a “smaller” cap company. I did just a little research, shown below.

One-year return summary

Highest conviction, “smaller” caps
o ZM: 590%
o DDOG: +188%
o CRWD: 138%

Strong companies, but very large caps
o AMZN: 90%
o NFLX: 91%

3-month return summary

High conviction, “smaller” caps
o ZM: 78%
o DDOG: +16%
o CRWD: 23%

Strong companies, but very large caps
o AMZN: 3%
o NFLX: -2%

Now some might point out ZM’s market cap is getting really big and could hardly be considered a “smaller cap”, and I agree with that. Definitions of large cap and small cap differ slightly between the brokerage houses, and the dividing lines have shifted over time. But my point is, historically, smaller cap companies grow faster than large cap companies, even the best in each of those categories. My example was it might be like investing in AMZN 10 years ago. It’s finding these companies before they reach the land of very large cap companies.

I hope you find this educational.

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I just wanted to point out that all the companies here are large cap.

Companies are typically divided according to market capitalization: large-cap ($10 billion or more), mid-cap ($2 billion to $10 billion), and small-cap ($300 million to $2 billion).

https://www.investopedia.com/terms/m/marketcapitalization.as…

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Companies are typically divided according to market capitalization: large-cap ($10 billion or more), mid-cap ($2 billion to $10 billion), and small-cap ($300 million to $2 billion).

Investopedia needs to update that, When companies are hitting a trillion dollars $10 billion just doesn’t see that large anymore.

Andy

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Don’t forgot Mega-cap, mega-cap generally refers to companies with a market capitalization above $200 billion. There are roughly 25-30 of those these days.

https://www.investopedia.com/terms/m/megacap.asp

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* I just wanted to point out that all the companies here are large cap.
* Investopedia needs to update that, When companies are hitting a trillion dollars $10 billion just doesn’t see that large anymore.
* Don’t forgot Mega-cap, mega-cap generally refers to companies with a market capitalization above $200 billion. There are roughly 25-30 of those these days.

yes, agreed on all accounts. That’s why I used the quotations “smaller cap” and “larger cap”, not following the strict definitions. But instead of focusing on the strict definitions, my point is that companies with smaller capitalizations, like CRWD, FSLY, DDOG, etc. typically grow faster than companies with very large capitalizations, like AMZN, MSFT, NFLX, etc.

Better yet, we find companies on or before they pass through $100M/yr in revenues with…

  • strong revenue growth (>60%),
  • high recurring revenue (~>60%),
  • high gross margin (>70%),
  • improving metrics
  • and strong competitive advantage and management.

According to a widely accepted McKinsey study published on April 1, 2014 entitled “Grow fast or die slow” (https://www.mckinsey.com/industries/technology-media-and-tel…) companies whose growth was greater than 60% CAGR when they reached $100 million/yr in revenues were eight times more likely to reach $1 Billion in revenues/year than those growing less than 20%. (satisfies Saul’s second criteria, behind being recommended).

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