It’s tempting to view firms with small market capitalisations as more risky investments than large FTSE 100 constituent companies.
However, big-cap firms can have their operational ups and downs, too. We only need to remember the recent big-cap share-price plunges of Royal Bank of Scotland, BP, Man Group and others to see how operational risks can affect our holdings in even the biggest of London-listed companies.
Risk and potential reward
Risk comes with all stock market investment, but companies with smaller market capitalisations often offer potentially greater rewards than many of the big-cap stalwarts. When a small-cap investment goes well, big capital returns can reduce the risk of holding shares in smaller firms by providing a cushion of investor profits to absorb ongoing share price and operational fluctuations.
Let’s compare the recent investor returns from defensive pharmaceutical Goliath GlaxoSmithKline (LSE: GSK) and fast-growing restaurant rollout and upstart company Tasty (TAST):
|
Market capitalisation |
Index/market |
Share price 3/1/13 |
Share price 30/3/15 |
Dividends |
Total return |
|
|
GlaxoSmithKline |
£76,354 m |
FTSE 100 |
1363p |
1584p |
175p |
29% |
|
Tasty |
£73 m |
AIM |
51p |
139p |
0 |
173% |
Tasty delivered investors nearly six times the return of GlaxoSmithKline over the last two years or so, and there’s every reason to expect the restaurant chain to go on beating the pharmaceutical giant in the years to come.
On a roll
Tasty’s restaurant rollout programme is going well. Monday’s full-year results revealed the firm added seven new outlets during 2014 and a further three since the end of the year, bringing the total number of outlets to 39.
The firm is operating at an opportune point in the general macro-economic cycle, with the nation’s finances in recovery mode, and the discretionary pound finding its way back into consumers’ pockets. Tasty builds its business by attracting discretionary (non-essential) spending with its mostly Wildwood-branded pizza, pasta and good-times restaurants.
The firm’s success shows in the numbers; revenue is up 28%, gross profit up 26% and pre-tax profit up 46% on the year-ago figures.
Plodding on
GlaxoSmithKline’s financial outcome for 2014 couldn’t be more different from Tasty’s. The firm posted turnover down 7% at constant exchange rates, and operating profit and earnings per share both down 40% compared to a year ago.
It’s no secret that the big London-listed pharmaceutical leviathans are rebuilding their product lines after patents expired on many bestsellers, allowing generic competition to swamp the market and wash away profits. However, even with the firm’s promising pipeline, it’s hard to imagine GlaxoSmithKline’s lumbering, slow-growing business model, and the company’s sheer size, ever producing investor returns to rival Tasty’s.
Stalwarts such as GlaxoSmithKline attract for their defensive, consistent cash-producing qualities, but we individual investors can build up sizeable cash-cushions of our own with shares of small-cap firms such as Tasty when they deliver on their strategic objectives.
