Making sense of Market Cap and the Value/Growth Dichotomy

Making sense of Market Cap and the Value/Growth Dichotomy

The market capitalization is the total value of the company based on the current stock price and number of shares outstanding:

Market cap = shares outstanding times Price

The financial industry usually divides them up as below…

Micro cap.................under 150 million

Small cap……....…..under $1 billion

Mid cap…………...$1 billion to $5 billion

Large cap………....$5 billion to $100 billion

Mega Large cap…..over $100 billion

This is a convenient way to get the lay of the land  but always remember to check the revenue line (the amount of business a company actually does). Micro caps are of course very speculative and can very easily fail but if you can catch one, the rewards can be lucrative. A more conservative investor might exclude them from consideration and focus instead on the small cap sector of the market. Even then he wouldn't want to take on positions too big as they can be risky as well. Some of that risk can be mitigated by insisting on conservative balance sheets and positive operational cash flow.

My favorite sector of the market to invest in is the mid cap sector where you can get the growth potential of the small caps along with the stability of the large caps. Larger caps usually have slower growth and are the domain of resource conversion activities.

In addition companies are further categorized as growth and/or value, so you might have one stock considered as small cap value while another might be called mid cap  growth. Blame it all on the box-checking consultants who are spawned out by the banks and insurance companies. This polarization of stocks into growth and value is nonsense. The true value investor aims not to buy stocks which are cheap on some accounting measure (p/e, price to book…etc) but to avoid investing in those stocks which are expensive using those same metrics. He is ultimately looking for investments trading at low prices relative to the estimate of their intrinsic value (the future value of cash flows discounted to the present). Buffet himself has said that growth and value are joined at the hip.

It’s Difficult to create value without growing, unless there is some chance of  resource conversion  going on, but that usually is the realm of the large caps and you have to dig to find it. A lot depends on the perception of the investor; one person’s growth stock could be another person’s value stock.

Investment style labeling is just dumb. Just concentrate on whether the market is efficiently valuing the future cash flows of the company you’re investigating.