Investor Sentiment Towards Small Cap Stocks

In the current economic climate, morale among small-cap stocks is low. A recent survey by the Quoted Companies Alliance (QCA) found that almost one in four small- and mid-cap quoted companies currently see no advantage in maintaining their listing on the London Stock Exchange. This sentiment is driven by concerns around depressed valuations, a lack of investor interest, and excessive compliance hampering performance and growth.

In contrast, the S&P 500, an index of the largest US-based public companies, has returned 19.7% over the past year. Meanwhile, the Russell 2000, which includes small-cap stocks, has grown by only 5.8%. This suggests that public market investors are gravitating towards the relative safety of larger companies, with more diversified business models and lower failure rates.

Our own research on EV / Revenue valuation multiples, which analysed a sample of 132 publicly listed HealthTech companies, revealed a consistent discount for small-cap stocks in the public market. Companies with a market capitalisation greater than £1 billion traded at a significant premium to companies with a market capitalisation of less than £100 million.

This disconnect observed in the public markets could potentially present a wealth of opportunities for investors. There are likely numerous high-quality companies that have fallen out of favour with investors, despite having strong business fundamentals. These companies could be attractive to private equity buyers with a longer time horizon or strategic acquirers looking for inorganic growth opportunities.