Three important points of TDR:
- Coverage gap: Highlights a notable gap in research coverage, showing that smaller and microcap companies are under-analyzed compared to larger companies.
- Earnings Reality: Many small-cap and micro-cap companies generate large amounts of earnings, and the myth that they are mostly speculative, unearned, and worthy of investigation is false.
- Data Science Solutions: Recognizes that data science is key to improving research coverage, enabling efficient analysis of large datasets, and ensuring informed investment decisions across all market capitalizations It has been.
In this article, we will investigate companies listed on stock exchanges around the world, categorized by market capitalization. It analyzes the current state of coverage and identifies critical gaps, particularly among small-cap and micro-cap companies. This article then explains how data science provides solutions to these problems and enables analysts to obtain accurate analysis from large datasets directly from their desktops. By leveraging data science, we aim to improve research coverage across all market capitalizations and ensure analysts have the tools they need to make informed decisions.
Measuring global financial markets by ticker symbols
There are 160,869 ticker symbols around the world. However, this figure includes overlap due to multiple listings of companies and ETFs across different countries and exchanges, excluding futures, options, bonds, mutual funds, and hedge funds.
After removing duplicates, the total is 73,752 listings. For example, companies listed in both Canada and the United States are counted as duplicates, which significantly reduces the dataset. Additionally, the analysis should exclude non-corporate entities such as ETFs, closed-end funds, and other structures. After this narrowing down, 54,895 companies remain, considering only the primary ticker symbol. Primary symbols are selected based on trading volume and company operating location.
Understand the proportion of mega, large, midsize, small and microcap companies
FINRA (Financial Industry Regulatory Authority) is a nonprofit organization whose mission is to regulate its member securities firms and foreign exchange markets to ensure investor protection and market integrity. We categorize companies based on their market value as very large cap ($200 billion or more) or large cap ($10 or more). ($1 billion to $200 billion), midcap ($2 billion to $10 billion), small cap ($250 million to $2 billion), and microcap (less than $250 million). The breakdown includes 56 mega-cap companies, 1,596 large-cap companies, 3,927 mid-cap companies, 13,382 small-cap companies, and 34,778 micro-cap companies.
Despite the prominence of famous giants such as Amazon and Apple, they only make up a small portion of the stock market. Additionally, major indices such as the S&P 500, Russell 3000, and Wilshire 5000 include only a small fraction of publicly traded companies, indicating a broader, more diverse market environment that is often undervalued.
Survey scope covering entire market capitalization
As the market capitalization increases, the research coverage decreases. While the coverage for giant stocks is 100%, the coverage for small caps drops to 50% and the coverage for microcaps is only 15%.
The assumption that small-cap and micro-cap companies are speculative and have low returns is not entirely accurate. Contrary to popular belief, a significant percentage of these companies actually generate significant revenues. According to data science based on S&P data, 100% of mega-cap stocks, 99% of large-cap stocks, 86% of mid-cap stocks, 83% of small-cap stocks, and 69% of micro-cap stocks report annual returns. Over $10 million.
Why don’t these profitable companies have research coverage?
Over the past 25 years, the number of research subjects has declined around the world. This trend is primarily due to the lack of incentive for large investment banks to allocate resources to covering small-cap stocks that are less likely to generate future investment banking profits. Therefore, small-cap companies that are doing well, buying back stock and paying down debt may not need investment banking services going forward.
How many small and microcap companies with annual sales of more than $10 million have no research at all?
In total, there are 28,172 companies classified as small-cap or micro-cap companies with market capitalizations of $2 billion or less and annual revenues of more than $10 million. Of these, 10,125 are covered by analysts. 18,047 or 64% were not included in the survey. It is important to note that these are not just speculative companies, but real companies that generate significant revenues.
What could be a potential solution to this?
Advances in data science technology have greatly increased the ability to process large datasets that were once nearly impossible. For example, we manipulated over 160,000 ticker symbols to generate the accurate data for this article. Previously, it was impossible to accurately manage such vast amounts of information from a desktop computer, with only three or four variables at a time, let alone ten or more. Additionally, data quality was also a major issue, as datasets often included multiple tickers or listings for a single company. Gaining access to clean, accurate data is the first step toward providing comprehensive research solutions to many unprotected businesses.
conclusion
An analysis of global research coverage focused on the use of data science has identified a significant gap in the coverage of small and microcap companies. Despite their numerous ticker symbols and important roles, these companies often receive less attention than larger companies. Data science offers a solution to this problem by increasing the accuracy and scope of market analysis and allowing for a more equitable distribution of research coverage. This approach will not only address current deficiencies but also improve transparency and efficiency across the market, making it essential for future research practice. If you want to stay up to date on all of TDR’s research, subscribe to our daily Baked In newsletter.
