Being chief executive officer of a multibillion-dollar conglomerate has its benefits, but it also has drawbacks. In Warren Buffett's position at Berkshire Hathaway (BRK.A +0.27%) (BRK.B +0.26%), there is one thing that he cannot do that you and I can: buy companies with small market caps.
Back in 1999, Warren Buffett claimed he could make 50% a year with $1 million. He also noted that if he ran a smaller pool of money, he'd be fully invested and not in cash.
So why is Buffett making these claims, and how is this an advantage for you and me?
A small-cap stock barely moves the needle for a company like Berkshire
When any investor or company owns 10% or more of a company, they become a "principal shareholder." When this mark is reached, the owner officially becomes an insider, per the Securities and Exchange Commission, and must report security transactions within two business days. It also grants the owner vast voting power, allowing them to influence the company's direction.
For the most part, Berkshire Hathaway tries to avoid doing this so the companies it invests in can run themselves, and so Berkshire can acquire or sell a stock without alerting the general public immediately.
NYSE: BRK.B
Key Data Points
Now, let's apply that thinking to small-cap stocks.
Small-cap stocks have a market value of $300 million to $2 billion. If Buffett took a 10% position in a company at the high end of that range -- $2 billion -- the investment would only be worth $200 million. For comparison, Berkshire's portfolio is currently valued at about $319 billion. With the hypothetical investment only making up about 0.06% of the portfolio, it wouldn't move the needle much, even if it went up 10-fold.
Whether you're running a much smaller fund or just making individual investments, you could take a position in these companies and benefit from their rise -- something Buffett can't do.
Also remember that all of the largest companies in the world started as small caps.
So let's look at a few small caps Buffett might buy if he ran a much smaller company.
Fantastic small-cap companies are out there
Two stocks I could see Buffett buying, if his fund was small enough, are Live Oak Bancshares (LOB +0.38%) (with a market cap of $1.3 billion) and PubMatic (PUBM +2.88%) (with a market cap around $716 million).
Everyone knows Buffett likes bank stocks, and Live Oak is just up his alley. Live Oak is the largest Small Business Administration (SBA) lender through the SBA 7(a) and SBA 504 programs. It saw a huge revenue boost during the pandemic when small business loans were handed out like candy, but it still retained its top lender status despite the slowdown.
NYSE: LOB
Key Data Points
Another key Buffett point: Live Oak's stock is cheap. With a price-to-earnings ratio of 6.8, it's near an all-time low. There are some concerns about how rising interest rates will affect its lending programs. But assessing it from a long-term point of view, as Buffett would, it looks like Live Oak's SBA leadership will drive the stock higher.
Although Buffett tends to stay away from tech stocks, he might make an exception for PubMatic. PubMatic is an advertising tech company that works with ad publishers and app developers to get their ads to demand-side platforms (like The Trade Desk) or advertising agencies.
NASDAQ: PUBM
Key Data Points
At 17.5 times earnings, PubMatic is both a relatively cheap and profitable tech stock. Furthermore, analysts forecast 9% revenue growth for PubMaticnext year, which isn't bad considering how challenging the advertising environment is currently.
While Buffett can't buy small caps like these, you can. And if the roles were reversed and Buffett were in your shoes, he'd be searching high and low to find the best small-cap stocks. There are thousands of small-cap stocks out there, and though information is scarce because of their size, their size gives you an opportunity over the most prominent investors. Use this edge to gain the upper hand in terms of performance over Buffett's company and other large investors.
