Small-Cap Financials: An Overlooked Niche for Value Investors

During their recent episode, Taylor, Carlisle, Daniel, and Collins discussed Small-Cap Financials: An Overlooked Niche for Value Investors, here’s an excerpt from the episode:

Tobias: What about the smalls? Do you ever dig through the smalls? Anything interesting in there? At the moment, I can find operating businesses in there that seem pretty good value, pretty good businesses, pretty good valuations. I think I said that. But pretty good business, pretty good valuations.

Vincent: Tobias, when you say the small, the small caps you’re saying?

Tobias: Yeah, small. I think Diamond Hill, Value Line, Big Larry, those kind of names. So, they are all pretty interesting.

Porter: We don’t own a lot of those things. And the funny thing is, we’ve been buying some small cap financials recently. [crosstalk] The markets are just inefficient. Robinhood came out, and they offered a 3% cashback card. And as a good value investors, Vinny and I, are cashback card holders, and so we go, “Holy crap, 3% cash back? Let’s do it.” And so, we signed up for the Robinhood card, which everyone should, and we said, “Crap, who’s doing this card?” And we found this little bank called CCB, Coastal Community Bank. They’re taking most of the operational risk, but not taking the credit risk, which Robinhood blow up on the credit card. But that’s three or four years down the road. And they won the Walmart contract recently too. So, they’re about to be the card behind Walmart.

And so, I’m sitting there looking at the stock, it’s average value for a bank, but they have two massive catalysts ahead of it. And no one cares. The bank investors, we talked to, like, “Ah, there’s risk. There’s this. There’s operational. Oh, these are rented banks, and the regulators hate the rented banks.” I got that. Do your due diligence. But there are small cap names. Listen, you know better than anyone. Small caps are very inefficient, because there’s not many eyes looking at it. Everyone’s doing ETFs, and the active managers are all in large cap stock. So, there’s a lot of orphans in small cap.

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