Interest rates and the cost of capital are key to the performance of growing smaller companies. Most investors buy smaller companies for growth, not for value.
There are several reasons for this, including:
- The risks of buying a lower growth model at a cheap valuation are higher in smaller companies
- Balance sheets are more vulnerable
- Business models are more focused and less diversified
- Liquidity is a challenge, so investors may find selling the shares expensive or difficult to execute if bad news breaks
This means it is safer to focus on quality and growth, buying reliable business models with sustainable and repeatable earnings, and ultimately strong growth.
The trade-off is that such companies command higher valuations.
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