It is easy to fall in love with large cap stocks in this kind of environment. In addition to being the best performing stocks in most sectors during the recent rally, large cap stocks provide a good degree of comfort. These usually multinational companies tend to have strong balance sheets, diversified products and services, and diversified exposure to various domestic and overseas market.
Often the best run companies in an industry, like Apple (AAPL) and IBM (IBM), are the biggest. However, while large institutional investors prefer these large companies, often the best run companies that offer the best value are medium to small cap companies. While the market has run nearly 30%, small caps have generally lagged the most of their larger peers by a moderate to significant margin. Given that large caps have performed so well over the last couple months, I think it is worth looking at several smaller companies that have been talked about less.
Core Laboratories (CLB) has quietly been one of the best run companies in the oil industry for some time. A nearly 6 billion dollar company in market capitalization, Core Laboratories specializes in measuring oil reserves at extreme depth. This company both attempts to measure and then help design extraction strategies for their larger peers. While oil finds have been harder to come by, most of the largest recent finds in Brazil, the Gulf, and West Africa, have been deepwater finds.
Also, while most oil service companies are fairly capital intensive, spending about 10-15% of their annual cash flow on capital expenditures. Core Laboratories spends only 3-4% of its annual cash flow on its business operations. Given the company's strong cash flow and impressive growth, it is no surprise that they have raised their dividend by double digits each of the last several year, and also paid special dividends of between 1-2% nearly every year for the last five years for the last couple years.
Another strong performing stock that is talked about very little because of its small size is Evercore Partners (EVR). An independent investment bank that recently raised its dividend by 20% and handily beat analyst estimates for the third consecutive quarter, Evercore Partners recently worked on the International Paper (IP) acquisition of Temple-Inland and the Google (GOOG) acquisition of Motorola Mobility. While many of the larger financials have been marred in regulation and shrinking consumer banking revenues, the independent investment banks have been able to poach top executives from these companies and maintain fairly impressive revenue numbers.
Finally, another company that is performing very well in a sector that gets little attention is Aercap (AER). The airline sector has had its issues over the year, but the airline leasing business remains strong. Demand for new airplanes that more fuel efficient from companies like Boeing (BA) continues, and even more cash strapped companies like American Airlines (AMR) have been able to order large planes. With energy costs at the higher end of their historical range most airline companies are being forced to update their planes out of necessity. With interest rates low the airline leasing business has remained fairly strong.
Aercap has distinguished itself within the industry as being one of the larger players amongst a field of fairly small companies. A company with a market cap of just roughly 1.8 billion, Aercap operates around 350 airplane around the world. The company survived the recession and subsequent run-up in oil prices by getting a large cash infusion from the Abu Dhabi investment fund, and they were able to acquire smaller companies like Genesis Lease for favorable prices during the downturn. Even during period of heightened uncertainty during the recent recovery period, demand for new aircraft has remained fairly steady.
To conclude, the best value is often found with larger companies. Many large companies like Apple become large by consistently making the kinds of business decisions that enables to differentiate themselves from their competitors. However, every sector has well-run companies that are medium to small-cap companies.
Also, with current investment trends heavily favoring large cap companies, it is worth looking at some of the better run companies whose small size makes significant long-term growth seem more reasonable. Small companies often operate regionally, but many today do business in the same markets around their world as their larger peers. With capital cheap and the economy recovering, these companies could very well also be takeout targets in the near future as well.