Companies show their worth in the small-cap world

SMALL CAPS

Companies with track records of high returns on invested capital can be purchased at very attractive valuations

As a group relative to large-cap companies, small caps are not necessarily cheap right now if you measure the asset class using traditional metrics such as price-to-earnings or price-to-book ratios. However, drilling down within the small-cap universe, you find a definite dispersion in valuations. For example, the rally in the Russell 2000 from the March 2009 low through to the middle of April 2010 was led by lower-quality companies, such as non-earners, low return on equity generators, and non-dividend payers. As a result, quality-oriented companies, in our opinion, are “on sale”. Co...