Small/Mid-Cap Equity Assets

Central State Financial LTD has established its own internal standards and criteria to define the classes of small and mid-cap equity assets:

Small cap equity assets have a minimum capitalization of one-half to one billion dollars, and mid-cap companies have market values of up to five billion.
Both small and mid-cap companies present a higher potential for significant growth, but that growth is offset by higher price volatility and risks.
Although many small- and mid-cap companies have been operating for several years, the quality and availability of financial and other data about the companies may be limited.
Small- and mid-cap management might reflect more turnover as the company struggles to define the best operating style that leverages its inherent value.
These asset classes do not drive economic cycles, but neither do they strictly follow them. Many of these assets are outliers or disrupters in relation to standard industry sectors and market cycles.

Given the differences between these characteristics and the factors that define large cap equity assets, the research standards that Central State Financial LTD applies to the latter would produce skewed results if applied to the former. Accordingly, our analysts approach small and mid-cap equity assets from a different perspective, but always with an intent of identifying assets in this category that deliver value, growth and income in accordance with the client’s wealth management plan.

Key Aspects of Central State Financial LTD Small and Mid-Cap Equity Asset Research Protocol

As with large cap equities, Central State Financial LTD focuses on a small or mid-cap company’s management, operations, and finances. That focus, however, comes from a different angle:


  • management experience and ability in moving a company into the next tier with creative strategies and fewer resources
  • profitability as demonstrated by quarterly and annual comparisons of gross margins, operating margins, inventories, receivables, and payables
  • control of corporate debt, with measurements of overall debt against the company’s book value, and in no case more than two times net current asset value
  • a current ratio (e. current assets divided by current liabilities) of less than two
  • strong current demand for goods or services and strong prospects for future demand unsullied by new participants in the market or new technologies that make existing technologies obsolete

A key feature of strong mid capital growth equity assets is their ability to generate earnings and value that increase from one measurement period to the next. These increases are s strong indicator that a mid-cap company is establishing itself to move beyond its current mid-cap status. Central State Financial LTD wealth management advisors define performance benchmarks from mid-cap market indices and recommend baskets of mid-cap equity assets that have the strongest potential to outperform those indices.

We also look for mid-cap companies with a demonstrated ability to execute a defined strategy with the necessary adaptability to withstand unanticipated disruptions and pressures. Management’s ability to scale an existing business in response to those pressures reveals an appropriate mindset for the sector. Further, our advisors expect mid-cap companies to have a potential and ability to grow organically without acquisitions, mergers, or partnerships with parallel providers of goods or services. 

Because mid-cap growth assets are more volatile, our managers and research analysts monitor them more closely and are quicker to recommend adjustments in asset allocations if those adjustments are consistent with the results of our fundamental research. Central State Financial LTD eliminates emotional decisions from this process by engaging all members of a team that serve the client’s wealth management goals. We expect more volatility in fundamentals and valuations with mid cap assets and rely on our proprietary research methodologies to separate signal from noise. By combining quantitative analysis with input from the entire team, we give clients assurances that our recommendations are based on the most objective information that may be available.

Central State Financial LTD process for researching and evaluating small cap equity assets is similar to its mid-cap approach. The primary difference is additional scrutiny, which reflects the fact that risk levels increase as a company’s overall capitalization decreases. Investors who adopt a small cap growth strategy as part of their wealth management plans will generally understand and accept these higher risk levels. Regardless, Central State Financial LTD wealth advisors universally believe that an investment portfolio that is constructed around small cap growth equity assets should include stops and alarms to limit value erosion from those risks.

Our selection process begins with a rigorous bottom-up research approach into the fundamentals of each small cap equity asset, with a special focus on the company’s management team and its ability to sustain and expand growth with limited cash and low or no capital reserves. All of our small cap recommendations get an increased layer of scrutiny from both research analysts and wealth advisors that work in concert to detect problems before they spiral out of control. This enables our investor clients to get into or out of a small cap opportunity before those problems create unprecedented downward value spirals.

Growth in small cap equity assets, even when strong, can be ephemeral. Our research approach removes emotional decisions that are based on market exuberance and substitutes a more disciplined approach to evaluating small cap companies. Further, we compare our recommendation to both small cap market indices and to other similarly-situated small cap entities to verify the integrity of our recommendations.

Our research and analysis of small cap companies reflects a more nimble and reactive approach that remains based on objective assessments and evaluations. Clients that adopt a small cap strategy as part of their overall portfolio will account for more active trading in and out of opportunities, as those opportunities tend to arise and fade more quickly in this equity asset sector. 

A hybrid small and mid-cap “SMID” strategy involves the most hands-on, active approach to asset allocation in a portfolio that is based on a wealth management plan which calls for concentrated investments into small and mid-cap equity assets.  Our research analysts develop a slate of 60 to 90 companies with varying capitalizations, and evaluate each company’s management teams, reputation for innovation and quality, and unleveraged value that can be used to drive internal; growth. From that slate, our wealth advisors select an optimal blend of small and mid-cap companies that best coincides with a client’s plan.

Central State Financial LTD process to identify those assets focuses on free-cash-flow metrics and capital allocation as opposed to traditional accounting-based metrics such as price-to-book and price-to-earnings. We look for a consistent, straightforward ability to generate free cash flow and to allocate it effectively. We rate each company’s management team on their commitment to transparency and building shareholder value. A SMID strategy, in itself, might be higher risk and subject to greater volatility, but we believe that the companies uncovered by our proprietary process have inherently less volatility due to their ability to generate cash flow.

A key benefit to this approach is that it uses discipline and objective information to drive investment decisions with low or no input from emotions and market exuberance.  The clients that have adopted some form of this strategy typically see recommendations that are priced at or below book value and that show a history of reasonably stable growth and earnings with no severe interruptions or dislocations.

As with our other investment recommendations, we frequently rebalance SMID allocations to verify that our investor clients have balanced portfolios with sustainable cash flow, high internal rates of return, and realistic P/E ratios.

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