Big Companies Have to Buy Growth
Investors realize many things about the market but fail to piece them together.
The executives that lead companies are mostly paid for growing the company. The shareholders reward the company with a higher stock price when it grows.
Naturally, companies should want to grow at any time they can to make more money. But it’s hard to grow a company in recession. So companies will have to buy growth.
How Companies Buy Growth
Large cap companies can easily buy growth by purchasing other firms in their industry. Google, for example, purchased a small software company that tracked flights and flight pricing. In doing so, Google bought a new source of growth for the company.
Businesses are extremely cash rich in America. We’ve written previously that businesses have as much as $1 trillion – actually more – on hand in their corporate accounts. Why wouldn’t a company deploy cash to buy up smaller companies in their business? They can essentially buy growth at a very cheap price; cash does not contribute much to shareholder value.
Reassess Your Allocation
Investors should reassess where they put their money going forward. Investing in large cap stocks has its merits – especially when one considers safety and lower volatility – but it also has its limits; large cap stocks don’t win any races.
On the other hand, small and mid cap stocks outperform large caps but with more volatility. However, as growth CEOs start looking to fuel the growth engine, the only natural place to look is to smaller companies that the large companies can afford to pay for.
When you think about your investments, you should look for companies that have not yet maximized shareholder value, but are likely to do so in the future. One great place to find maximized shareholder value is in the buyout of a single firm. If you hold shares in a company that gets acquired, then you always get the full asking price, if not more. Shareholders are very, very good at getting full price and forcing the board to get a premium for selling the company.
