The fall in stock markets in the past two years has seen many former giants relegated to small cap status. What does that mean for investors?
Even after the recent rally in share prices -- the FTSE 100 is up 27% since early March -- many businesses are still worth a fraction of their value at that start of this crisis. The terms 'small cap' and 'micro cap' have taken on a whole new meaning.
Where one draws the line with these definitions is a bit arbitrary. While the FTSE 100 can be considered a 'large cap' index, its smallest constituent at the moment is property group Liberty International (LSE: LII); currently its shares have a combined value of £1,457m, having fallen as low as £1,026m in March, which some would regard as putting it firmly in mid cap territory.
And despite its share price falling more than 90%, troubled bank RBS (LSE: RBS) is still decidedly large, with shareholders owning £24.8bn worth of stock. HSBC (LSE: HSBA) is now the biggest company on the market, with a value of just over £100bn.
Companies on the mid-cap FTSE 250 index typically range in size from about £200m to Wolseley (LSE: WOS) at £3.9bn.
Household names
Many of the shares that have collapsed in value are not so well known to the general public, but Yell (LSE: YELL), publisher of the ubiquitous Yellow Pages, is among the fallen. Formerly a member of the FTSE 100, Yell has dropped in value from over £5bn two years ago to just £344m today.
There has been considerable carnage on the High Street also. Sports retailer JJB (LSE: JJB) was once worth £1.2bn, but is now down to a valuation of just £70m. It's a similar story at rival Blacks Leisure (LSE: BSLA), which has fallen from approximately £250m to under £20m. And let's not forget Woolworths, which was wiped out at the start of the year -- it was worth over £1bn at its peak.
Jessops (LSE: JSP), the camera shop chain, has crashed from £170m to a mere £7.1m. Despite never making a profit, Coffee Republic (LSE: CFE) was at one time valued at over £40m, but is now worth less than £3m.
Irish-based newspaper publisher Independent News and Media (LSE: INM), whose British titles include The Independent, has a similar tale of woe: A business worth nearly £450m two years ago is now valued at £34m.
An even more extreme example of the new small caps can be found in the United States. Automobile giant General Motors, maker of the Vauxhall brand in the UK, is now worth a paltry $695m, or £460m, as investors fear their holdings will be wiped out in a possible bankruptcy.
Small cap funds
Many small cap and medium cap fund managers have not altered their size limits for eligible shares in their portfolios, even though the general valuation of the market has fallen. As a result, some of these former giants now fall within their remit, which is an interesting situation for investors.
And similarly, many of the former small caps are now so tiny that they are even more difficult to trade in meaningful volumes, which creates another headache for fund managers.
For investors, it really depends on whether they are happy to invest in these sorts of shares. Many will have bought into small cap funds in the hope of getting exposure to new and hopefully growing businesses, rather than declining companies, some of which may have the ability to recover if business conditions improve.
As always, check the details of what you're buying.
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