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Hearing lots of arguments on why small and mid caps are ultra cheap now and the valuations are at decadal lows. Reality is that most quality small and midcap stocks still largely trade at fair to rich multiples.
Forget 2008, small and mid-caps are nowhere close to even 2013 valuations. In 2013, a large part of the smallcap universe was available at less than 10x P/E. There were many high quality biz (high ROE, 0 debt, +ve fcf) available at less than 5x P/E. Some even below cash on book.
We hardly see that right now. Try running a screener for companies with 10y avg ROE>20% and ~0 debt and less than 15x P/E. Minus the PSUs the number of cos that fit these criteria are still small. That doesn't quite seem like throwaway prices.
If prices appear ultra cheap, it has less to do with fundamental intrinsic value and more to do with anchoring. After 2015, we had slowly reset the fair multiples from 10x to 20x to 30x. Only in few cases was that justified by actual biz performance.
As the bull market continued, 30x became the "new normal" firmly entrenched in our brains. Now that multiples are resetting closer to earlier levels, we find this "irrational" behavior (especially when it comes to stocks that we ourselves own).
This doesn't mean that you shouldn't be investing in small/midcaps right now. Just don't be under the impression that there isn't any downside or that you will now make extraordinary returns like those made by smallcap investors in 2013.
Just keep expectations low and you will be fine.
(hopefully 🤞)
(hopefully 🤞)
