Bloomberg News Nir Kaissar has some bad news: The stock market, particularly for smaller companies, is
becoming a dumping ground for low-quality, unprofitable companies.
JPMorgan’s CEO Jaime Dimon mentioned that the number of listed companies went down from 7.300 in 1996 to 4,300 today. More companies are staying private.
This is because:
- Regulations have made the cost of being a listed entity more costly.
- With cash from private equity, smaller companies do not need to list. Why go public?
This does not mean that private equity is a winner because private equity may bypass more intense scrutiny which means your private equity fund may own shitty firms.
This phenomenon has made investing in small caps, represented by the Russell 2000 index, challenging.
How does this shape the Russell 2000 index?
The average quality or profitability of companies has declined.
The article measures quality by return on equity [ROE] (net profit divided by book value). The ROE declined from 7.8% to 2.4% currently. This is consistent...
