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Safety Comes At A Price

There was a tweet that I sent out last month that garnered a lot of attention and recommendations.

I still stand by this because, during 2021/2022, the flight to safety in large caps has been overdone. It was only a matter of time before they themselves suffered from guidance cuts and loss of faith from money managers.

But even after the big names have held on for so long, they’re still expensive.

Let’s take a look at the above chart. Relative to other buckets, the S&P 500, Growth, and Value indexes are incredibly overvalued to their peers.

The reason that I’m showing this is that I do think that small caps are really going to come out of this turmoil in much better shape.

Take the Russell 2000 Value, for instance, the index is profitable and is trading at forward 9.2x earnings. Given how many beaten-down names are in that index, do you really think that you can’t find companies in there that could yield a much better return than paying up for S&P 500 large-cap names just because they’re safer (allegedly)?

With the recent banking crisis, rates climbing, and inflation proving to be more sticky than many hoped, perhaps you should spend your time dumpster diving in smaller names in order to get outsized returns.

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Until next time,

Paul Cerro | Cedar Grove Capital

Personal Twitter: @paulcerro

Fund Twitter: @cedargrovecm

HoldCo Twitter: @cedargrovech

Disclaimer: All information provided herein by Cedar Grove Capital Management, LLC (“Cedar Grove Capital”) is for informational purposes only and does not constitute investment advice or an offer or solicitation to buy or sell an interest in a private fund or any other security. An offer or solicitation of an investment in a private fund will only be made to accredited investors pursuant to a private placement memorandum and associated documents.
Cedar Grove Capital may change its views about or its investment positions in any of the securities mentioned in this document at any time, for any reason or no reason. Cedar Grove Capital may buy, sell, or otherwise change the form or substance of any of its investments. Cedar Grove Capital disclaims any obligation to notify the market of any such changes.
The enclosed material is confidential and not to be reproduced or redistributed in whole or in part without the prior written consent of Cedar Grove Capital. The information in this material is only current as of the date indicated and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Any statements of opinion constitute only current opinions of Cedar Grove Capital which are subject to change and which Cedar Grove Capital does not undertake to update. Due to, among other things, the volatile nature of the markets, and an investment in the fund/partnership may only be suitable for certain investors. Parties should independently investigate any investment strategy or manager, and should consult with qualified investment, legal and tax professionals before making any investment.

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