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Saturday, 25 February 2012

Size matters: blue chips recover faster

They have a greater tendency to bounce back when recovery comes while small caps fall by the wayside


THE Straits Times Index has risen by 12 per cent so far this year. At a lunch this week, a friend commented that only the blue chips or the big-cap stocks have participated in the rally so far. Many of the small-cap stocks are still in the doldrums.


Blue chips are unlikely to lose 90 per cent of their market value as some smaller caps do, when their businesses are permanently impaired following a drastic change in environment.

I was curious as to whether that is indeed the case. So I decided to find out the prices of the stocks on the Singapore Exchange relative to their three and five-year highs and lows.

Overall, Singapore stocks are currently trading at a median 84 per cent higher than their three-year low, registered mostly in March 2009. Relative to the three-year high hit in April 2010, the median stock is still 39 per cent below that level.

For the five-year range, the median stock is 96 per cent above the March 2009 low, but also a long way from the peak reached in July 2007. The median stock is still 60 per cent below the peak reached in the last bull market.

But if we take only stocks with trading history that go back either three years or five years, then the median appreciation from the three-year low - also in March 2009 - is 94 per cent; while relative to the peaks April 2010, the median price level is still 39 per cent below that.

Between February 2007 and now, the median share price is 108 per cent above the lows in March 2009, and 65 per cent below the peaks in July 2007.

So now to the question: Is there a difference in the performance of the various segments of the market? Do all stocks perform uniformly, or is there a variation in the performance depending on the size of the companies?

In the accompanying table, I broke down the median price performance of stocks based on their market capitalisation. I grouped the stocks with market caps of $1 billion and above into one category, those between $200 million and $1 billion into another category, and those between $100 million and $200 million into yet another category. Finally, the last group would be stocks with market caps below $100 million.

The stocks were grouped based on their market caps on Feb 23, 2007 and on Feb 23, 2009 for the five- and three-year trading ranges.

From the table, you can see that the bigger the market cap of a stock, in general the better it performs relative to its three- and five-year lows and highs.

For example, for stocks with market caps of $1 billion and above, they are only 41 per cent below their five-year highs, and 13 per cent below their three-year peaks.

The smaller the stock gets, the greater the distance they are from their peaks. For stocks with market cap of $200 million to $1 billion, the median price is 58 per cent from the five-year peak.

Stocks with market cap of $100 million to $200 million have to climb 68 per cent before they reach the highs registered in July 2007. And for the micro chips, those with market caps of below $100 million, the climb is even steeper - at 72 per cent - before the previous peaks are in sight.

As for the bounce from the troughs in the last five years, again there is a strong correlation between size and the strength of the bounce.

For stocks with market caps of $1 billion and above, the median bounce from the five-year lows is 123 per cent. But stocks with market caps of $200 million to $1 billion proved a little more sprightly, with a median bounce of 128 per cent.

That's about the optimal size investors should go for if they seek growth. Any smaller, and the chances of any rebound from a crisis will be greatly diminished.

For stocks with market caps of $100 million to $200 million, the median current price levels is 110 per cent above the troughs, and for stocks smaller than that, it is 100 per cent.

The pattern is similar for the trading range over the last three years. Relative to their three-year peaks, stocks above $1 billion market cap have a median price which is only 13 per cent lower.

Those in the $200 million to $1 billion category are 32 per cent below their peaks; and those in the $100 million to $200 million category are 38 per cent from their three-year highs.

Again the micro caps are in general still very depressed, with a median price level which is 45 per cent below their recent peaks.

So what is the takeaway? For me, it is clear that size offers a safety feature that small caps don't have. Yes, during a crisis, a bear market, the likes of CapitaLand or Keppel Corp may fall along with the general market. But it is unlikely that they will lose 90 per cent of their market value as some of the smaller caps do, when their businesses are permanently impaired following a drastic change in the business environment.

And when the recovery comes, it is almost a certainty that the likes of Jardine Cycle & Carriage, and Dairy Farm will rebound back strongly. People will continue to buy cars, and they will continue to shop at Cold Storage.

Meanwhile, small caps have another obstacle working against them. Because of the sheer number of such stocks, some may get neglected even if their fundamentals are good. In circumstances like that, the sponsors are inclined to privatise the outfit and the exit price for retail investors sometimes may not even approach the fair value of the company.

So there is a tendency for good small caps to be taken out of the market, leaving the less desirable ones in the market.

On the whole, I'd say it is sounder to just stick to the established names and ride the ups and downs of the market with them.


  1. the next few weeks, she will write about small caps... she rotates her topics... i know it cause i bought her book, show me the money 1-4... lol

  2. Probably, she will write "Finding multi-baggers in small caps" LOL


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