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Weekly Small Cap Market Review: July 10 – July 14

By Mark Spatt, CFA, Investment Analyst at Cornerstone Investment Partners, sub-advisor of the AdvisorShares Cornerstone Small Cap ETF (NYSE Arca: SCAP)

This is a great time of the year. And no, I’m not talking about earnings season. Two of the greatest epics of our day are back on our screens: the Tour de France and Game of Thrones, and they are more similar than people think.

  • They both have the initials TdF in French (Game of Thrones = Trône de Fer)
  • They both involve lots of gore
  • They both show people on non-powered vehicles moving much more quickly through Europe than they should be able to
  • And importantly, they both demonstrate the importance of strategy, teamwork, and alliances

I’m not going to be cute and go through each of the teams (although Team Sky is definitely the Lannisters), but if you’ve ever watched the Tour, you know it’s as action-packed as any episode of Thrones: Breakouts form and collapse like family alliances, 130 mile long courses are mapped as strategically as any battle, and a fan favorite can get taken out like Ned Stark (6 years later, it’s not a spoiler anymore).

Companies can learn a lot from both TdFs.

Work together as a team against competition, but recognize that competition should be balanced against long-term goals. What makes Sky so successful, with their leader Chris Froome taking three of the last four Tours and in the lead this year, is their teamwork. Rarely is Froome stuck in a suboptimal position in the peloton or left without teammates on a difficult climb. His primary competitor Fabio Aru is effectively on his own with a team struck down by injuries, and with just seconds between the top riders (this is the closest Tour in history at this stage), any weakness will be exploited. But if everyone was just to attack constantly (e.g. the debates between Cersei and Jamie, or a price war), there would be nothing left at the end. Someone has to ride in front, and be willing to let someone else ride in front for a minute.

Think strategically. There was a moment during a recent mountain stage where Chris Froome was in a group with all of the key competitors, and they were closing in on the lead group ahead. One of Froome’s teammates in the lead group looked like he was suffering and slowed down just enough to appear to get caught. Instead, Froome jumped ahead and joined that teammate on a breakaway at just the right moment. In Thrones, Littlefinger engages in multi-year schemes, moving the chess pieces just enough to help himself towards his eventual goal. Companies need to know that good strategy is not something that seems obvious at first or has to work immediately. Consistent execution is more important than a single win.

Play to your strengths. The Tour has three primary competitions (there is a fourth, but not for this article), signified by three colored jerseys: The yellow jersey is the race leader, the green jersey is the points leader, and the polka-dot jersey is for the “King of the Mountains.” Each represents a unique set of skills. The points competition is for sprinters, the polka-dot jersey is for climbers, and the yellow is for the best all-around competitors. Rarely are they won by the same person in the same race, because if someone tries so hard to win the climbs or individual sprints, he will have little left to compete in a three week competition covering around 2,200 miles. Tyrion Lannister tries to avoid fighting, but instead “drinks and knows things,” Bronn and Barristan is/were the opposite. Particularly in small cap, where markets are smaller, it is easy to want to achieve growth by moving away from core businesses, but success in one field is not guaranteed in another, and the distraction and leverage taken to get there can doom a company.

The small cap market, as defined by the Russell 2000 Index, was up 0.9% overall during the week. The market was strong, as dovish sentiment from Janet Yellen supported investor sentiment, and growth and technology stocks ran. Energy (+6.1%, up on strong crude performance), Information Technology (+2.5%), and Materials (+2.4%, with the weaker dollar and good China data helped) were the strongest sectors in the Index. Financials (-0.9%, with banks down on dovish Federal Reserve takeaways), Telecommunications Services (-0.7%), and Utilities (+0.2%) were the weakest. Overall, small caps underperformed large caps as the Russell 2000 Index returned around 50 basis points less than the Russell 1000 Index (up 1.4%). Among small caps, growth again outperformed value, with the Russell 2000 Growth Index beating the Russell 2000 Value Index by approximately 75 basis points.

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