Why We Like (some) Small Companies

By Alex Bridgeman, Investment Advisor


We love investing in companies that offer clear paths for growth at cheap prices today with great management teams. It’s how our minds are wired, and we are always on the hunt for new, undiscovered opportunities. 

We have recently increased our focus on looking for smaller, undiscovered, and cheap companies to add to portfolios. The “small” part is the newest edition to our process, and we believe there is a ton of value to be found in companies that are below Wall Street’s investment radar, companies they can’t invest in.

If you’re in charge of investing $1 billion, $10 billion, $50 billion, you don’t have the time to buy a position in companies that aren’t going to move the needle. This is where we have the biggest of many advantages: no institutional money. Ian Cassel, a private investor, invests exclusively in small companies because, “When you find and invest in great businesses that bigger money doesn’t own, the stock has nowhere to go but up.” Take a $10 billion fund for example, for that fund to grow by 10% in a year they need to earn $1 billion through their investments. A company whose entire market value is only $50 million, only 5% of the required $1 billion, that company is not a candidate for investment. These companies are the despised, the unloved, cast aside by the big investment firms that run Wall Street. And where their love ends, our interest and attention begins.

One advantage to these small companies is how many are run by their founders or operators who own a piece of the business. We love finding a management team that has put their own money at risk in the business and are a shareholder themselves. Ownership alongside a manager who’s a shareholder gives us confidence that the management team’s incentives are aligned with ours. We want our management teams to think like owners. Owners don’t appeal to short term earnings and how they’ll be looked upon by Wall Street. Instead, owners invest for the long-term and ignore the noise and distractions. We want to invest in and partner with owners.

After filtering companies through the lenses of size and ownership, the nuance of analysis and research comes to the forefront. Small companies tend to be simple and easier to understand quickly. Think about it, what sounds easier to understand? A company that sells medical examination machines to a few dozen hospitals, or Johnson & Johnson? A helicopter shuttle business in NYC, or Delta Air Lines? These companies have fewer employees, products, revenue streams, costs, managers, and complexities, making them relatively simple compared to the behemoth companies Wall Street typically trades in.

All of this is not to say that small companies are going to become a core strategy for all portfolios, but our recent interest and investments in these types of companies provides a perfect example and time to share with you our thought process for buying companies. We love finding unique, hidden, under-appreciated areas where nobody is looking and getting great deals on investments that can improve the lives of our clients and future selves. We also enjoy sharing that strategy with you and hope this sidebar further illuminates our strategy as investors.