Market Cap is Key

In a previous post; I discussed the role of Moat and how moat can guide you to a golden egg in the best of times and the worst of times. There is one key problem with moat though; it is exceedingly subjective. What I might consider to be a wide moat; you may not and vice versa.

Take for example, David Bowie. Many would argue he has a wide moat as his name is ubiquitous throughout the world. His music and movies are world renowned with many accolades and awards. However, I am 33; and until he died; I had never heard of him. I had never heard a single song written or sung by him; and I never saw a single movie he was in. My friends and family had never mentioned him so when I saw headlines that David Bowie is deceased; I asked, “Who is this?”

So you may know who David Bowie is by name alone because he has a wide moat, but because I live under a financial rock; I had no idea who he was. So if David had approached me for investment opportunities; and I had never heard of him; how would I judge if he was a viable investment or not?

Notice how I said viable and not “good.” Viable means the investment is reasonable and may make sense if the investment passes basic due diligence measures later in the process.

So if he came to me; I would look for the market capitalization. What is the impact on the market? You take the number of shares outstanding multiplied by the share price. It’s really that easy, and for public companies, this information is readily available in most financial research sites, such as Google Finance.

Market capitalization will give you a realistic gauge of the size and scope of a company, which you can compare to other companies. General Electric has a market capitalization of $77.24 Billion whereas Johnson and Johnson is $343.96 Billion and on the much smaller side (relatively, but still quite large) we have Signet Jewelers at $1.32 Billion.

Have you ever heard of Signet Jewelers? No? Well; you can tell by the market capitalization that they are quite large so surely you have heard of them. What jeweler can be so large that they are valued north of $1B; what kind of sales are they doing to warrant this share of the market? Who are they and what do they sell?

See where I’m going with this? No Moat, but large capitalization means that there is something underlying the investment here that is driving the size of the company. So what is this no name company that is valued at 1.32 Billion as of today? It’s the holding company of Kay Jewelers, Zales, Jared, and Piercing Pagoda. So, in this case; the company has branded itself so well that very few have heard of the actual company name, but people know the subsidiaries.

In summary, Market Capitalization should be one of your key metrics to determine viability for investment. My lowest threshold is $1 Billion; I will generally not invest in anything that is less than $1 Billion. There are exceptions to this though; I invested in Apptio when it went to IPO and it was valued for less than $1B, but it turned out to be an excellent investment all the way up to it’s recent buyout by Vista Equity. As always though, remember that the bigger they are; the harder they fall. Not that they will fall, but you never know.

To freedom!

Matt

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