Active Management Can Help Find Value in Micro-Cap Stocks
September 8, 2022
A new post from steering committee member Franklin Templeton explains that there may be hidden value in micro-cap stocks and that active management is critical to uncovering it. The post was written by Oliver Wong, CFA, portfolio manager and research analyst for the Franklin Mutual Series, and details why active can play a pivotal role in successful micro-cap investing. He writes, “we think there is excellent potential for investors if they know how to uncover it.”
Like other asset classes, micro-cap companies, or those with a market cap under $1 billion, have suffered during the market downturn. Wong believes they are well-positioned for a comeback due to their long-term earnings outlook, their U.S. focus, and their history of bouncing back after a selloff.
However, finding the right companies to invest in is not easy, especially when it comes to micro-caps. Micro-caps may look similar on the surface, but they have fundamental differences that must be uncovered through active research in order to reduce risk and maximize the chances of a successful investment.
That research is key because many of these companies are simply ignored by big institutional investors and Wall Street analysts. With this lack of coverage, Wong writes that they may be trading at a “sharp discount to their fundamental value.” He explains that “this inefficiency leads to more opportunities for investors who can separate out the poorly run companies from those that offer real promise,” a service that active management can provide.
You can read more about Franklin’s views on active management micro-cap stocks on the Franklin Mutual Series website.