Emerging Giants Newsletter – September, 2018

In our August 2018 newsletter, we had highlighted that the valuation gap between good quality mid-small cap and large cap stocks had reached extreme and in our view unsustainable levels. At July 2018-end, the top 20% RoCE stocks in the large cap space traded at trailing 12-months P/E of 34x compared to 25x for the top RoCE mid-caps and 18x for the best RoCE small caps. This substantial gap was despite similar return ratios and earnings growth. The month of August 2018 saw a reversal in this trend to some extent with mid cap stocks clearly outperforming their larger cap peers.