O’Shaughnessy Asset Management examines why overlooked microcap stocks can create unusually inefficient pricing and potentially stronger long term returns. The paper argues limited analyst coverage, quality filtering, and combined value momentum screens helped microcaps outperform larger stocks historically, despite volatility and liquidity concerns.
A True Microcap Strategy
O’Shaughnessy Asset Management
Jim O'Shaughnessy
Research
5 Pages
Key Takeaways
Analyst Coverage Gap: 45% of portfolio holdings had no analyst coverage, while 75% had one or two analysts, supporting the paper’s inefficiency argument.
Cheapness Outperformance: From 1970 to 2015, $10,000 invested in cheapest microcaps grew to $6.5 million inflation adjusted versus $1.5 million for cheapest large stocks.
Quality Screen Impact: The strategy narrowed roughly 4,600 stocks into 136 holdings after eliminating the lowest scoring third across value, momentum, earnings quality, and financial strength.
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