The stretching valuation of the stocks of high-quality companies is, in part, a result of the valid recognition by investors that sustainably profitable companies are scarce, and the main priority since the financial crisis of individuals and company managements alike has been to attempt to reduce high debt levels rather than to borrow for greater spending or investment. Moreover, competition is fierce, with new business models threatening many established ones, so that the rare business with durable and rising profitability should be, and increasingly is, highly prized.
Shares of international small companies outperformed their large-company peers by 800 basis points in 2015. Small caps have, in fact, surpassed large caps in five of the last seven years, delivering annualized outperformance of about 500 basis points (12.8% versus 7.7%) since 2008. A new study by Clifford Asness and his colleagues looks at both company quality and size and finds that, in fact, quality small caps have outperformed quality large caps.
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