Friday, Sep 4th 2020

Looking off the beaten path


Last month, we launched Opportunities, our second investment strategy aimed at finding more "off-the-beaten-path" stocks that we believe are poised to deliver outstanding risk-adjusted returns over the long term.

But why look off the beaten path to begin with?  If you're looking to win over the long term, why not just own the established winners that have built the longest track records of execution and outperformance?

In many respects, that's the wrong question to ask, as the two approaches are not mutually exclusive. They're actually quite complementary. But the answer lies in the growth potential of companies that are still earlier in their journeys.

As a rule of thumb, smaller stocks do tend to have less brand awareness and shorter track records than larger ones. However, they also stand to grow more rapidly because they tend to be younger and have captured a smaller percentage of their total addressable markets as compared to larger names.  

What's key here is identifying the best-of-the-best amongst the smaller stocks - the ones that can become the "household names" of tomorrow.

Another factor to consider is that smaller stocks tend to receive less institutional coverage and awareness across the investing public. Many large institutional investors are even prevented from investing in smaller companies given their liquidity constraints.

For example, take one of our Opportunities holdings, SharpSpring (SHSP), which has only $130M market cap. Most hedge funds cannot own this stock because they wouldn't be able to take any meaningful position without materially impacting the stock price. Hence the opportunity (no pun intended).

What all this means is that there tend to be more buyers "on the sidelines" for these stocks today - buyers that would naturally come off the sidelines in the future as they grow and scale into tomorrow's giants.

For more on this topic and our new strategy, check out our full investment deck on Opportunities attached.

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