Small-cap stocks sure have taken a beating. The Russell 2000, the leading index for small-cap stocks, is down more than 11% since January. It's always painful to see your stocks falter. But let's be contrary: Abandon emotion and, instead, study history.
Master investors who've used market declines to build out their positions in great companies have accumulated enormous wealth. With collapsed valuations, they don't run for the hills; they run in from them to buy more.
Take a look at a company like Adobe Systems (Nasdaq: ADBE ) . The software publishing firm came public in 1986. The market collapsed a year later. Adobe was cut in half. Yet the small cap had a super-strong balance sheet, dedicated leadership, and a widening market opportunity.
Now here we are 18 years later. Adobe is still supervised by its two founders, John Warnock and Charles Geschke. Over these intervening years, the stock has fallen 50% or more on six separate occasions. There've been numerous short-term periods when owning Adobe felt like a magnificent mistake. Heck, from September 2000 to September 2002, Adobe dropped 75% as technology stocks were sold indiscriminately.
Yet over these 18 years, Adobe Systems has risen 60 times in value, turning a $10,000 investment into $600,000. That amounts to 25% yearly growth with taxes deferred. It's a market-crushing return, a thing of beauty that doesn't even include the dividends it began paying out back in 1990.
This is exactly the sort of business we stalk in Motley Fool Hidden Gems, as it featured the following traits:
- Devoted leadership
- A sound balance sheet
- Early dividend payments
- A wide market opportunity
- A broken stock price
Lest you imagine that Adobe Systems is an isolated example, look at the commercial characteristics and investment returns of Autodesk (Nasdaq: ADSK ) , United Fire & Casualty (Nasdaq: UFCS ) , Wal-Mart (NYSE: WMT ) , Stryker (NYSE: SYK ) , and Gap (NYSE: GPS ) . Each suffered numerous 30%-50% declines in the journey from small to large cap. Yet each absolutely crushed the market's return over the past 10 to 30 years.
We've found a number of these companies. And so it only makes sense that we're pleased as pudding by the opportunity to add to them on general market declines. You can view my 20 favorite small-cap companies now by taking a free trial to Hidden Gems with no obligation to subscribe.
Tom Gardner is co-founder of The Motley Fool, which is investors writing for investors.