Think Like a Business Owner

Adopting the mindset of a “business owner” is particularly helpful when navigating the often-turbulent waters of small company stocks.

After the September 2025 of the SmallCap Informer was published, news was released that long-term holding Air Lease (AL) was being acquired. This was particularly timely in light of our commentary from the September 2025 issue in which we outlined how our investing approach shares much with the methods used by acquirers of businesses. The philosophy of thinking like a buyer of businesses emphasizes a deep understanding of a company’s underlying business, its fundamentals, and its long-term prospects, rather than reacting to short-term market fluctuations or speculative trends.

The SmallCap Informer explicitly embraces this approach. Our “Quality and Growth At a Reasonable Price” (Q-GARP) methodology first and foremost seeks out well-managed businesses with strong fundamentals, and then seeks to buy them at attractive valuations.

For small company investors, this business-owner mentality is not just beneficial. It is often essential for identifying and capitalizing on opportunities that may be overlooked in larger, more liquid markets.

Small-cap companies frequently languish in the shadows due to a lack of institutional interest and limited analyst coverage. While large-cap stocks bask in the glow of wide analyst coverage, small-caps are often underfollowed by Wall Street, with consensus estimates for sales and EPS growth sometimes based on analysis from as few as one to five analysts (if any cover those stocks at all).

This obscurity leads to inefficiencies in pricing, which in turn creates golden opportunities for shrewd investors who are willing to conduct their own due diligence and focus on the company’s intrinsic value rather than market sentiment.

Small and medium-sized companies inherently experience a bumpier ride due to higher volatility, influenced by fewer analysts and low trading volumes. However, for a business-owner investor, this volatility is not something to be feared but rather a source of opportunity. Short-term market swings can provide ideal entry points to buy on the dip for such high-quality companies, empowering greater long-term success.

We acknowledge that stocks covered in the SmallCap Informer often have higher betas than the market, indicating greater sensitivity to market movements, but this increased risk is associated with the potential for higher returns.

Small-cap stocks frequently trade at remarkable discounts compared to their large-cap counterparts, sometimes hitting multi-decade lows. Historically, small companies often commanded a premium, making the current large-cap/small-cap valuation gap a potential treasure trove for discerning investors. This undervaluation creates a significant opportunity for investors focused on long-term value, as the market will always ultimately recognize any bargain, once the haze of market’s euphoria clears.

Many (though certainly not all) small companies are in early stages of their corporate life cycles, offering substantial growth potential that can lead to significant capital appreciation over time. As their operations expand, they can achieve economies of scale, reduce costs, and spread out selling, general, and administrative (SG&A) expenses over a wider base, leading to measurable expansion of profit margins over many years. This enables earnings per share growth to outpace revenue growth, a key driver of long-term stock price appreciation. SCI typically seeks out annual growth potential of at least 8% in both sales and EPS.

Companies with strong fundamentals, healthy cash flow, and impressive margins are also attractive to larger market players and private equity firms, making them appealing acquisition candidates.

While current higher interest rates can stifle some deals, accelerating merger and acquisition activity could benefit small companies as rates recede. A business-owner approach, focusing on these fundamental strengths, positions investors to benefit from such eventual takeovers.

Many small-scale businesses generate the majority of their revenues domestically, often operating in emerging industries. This domestic focus positions them to seize opportunities amid improving economic trends and can shield them, to some extent, from many of the global trade uncertainties that plague their larger competitors.

Even the most successful investors expect to make mistakes. The key is to analyze situations carefully, learn from errors, and avoid emotional decisions.

This long-term, disciplined approach, exemplified by SCI’s Q-GARP methodology, allows investors to uncover undervalued hidden gems in the less-scrutinized small-cap market, offering the potential for illuminating returns even amidst market volatility and economic uncertainty.

While large-caps may hog the spotlight, a healthy concentration in smaller stocks remains a key factor in achieving exemplary long-term returns.