Goose Eggs

Eric Cinnamond writes while many small cap stocks are down meaningfully from their highs, I believe valuations, on average, remain elevated. Nevertheless, given it’s been so difficult to find value for so long, it’s understandable to want to research and possibly buy a beaten-down stock. For absolute return investors diving in and searching for new ideas, happy hunting! Just watch those balance sheets. Financially distressed businesses and potential goose eggs can be devastating to performance and full-cycle absolute returns.

Higher debt levels can be seen from a bottom-up and top-down perspective. From a top-down perspective, most aggregate measurements of corporate debt are elevated. For example, the median net debt/EBITDA of the Russell 2000 is currently 3.2x versus 0.9x in July 2007 (the last market cycle peak).


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