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When the Second Largest Company in a Sector is a Better Stock Pick
0. What is this post about?
Stock investors like high returns with minimum downside (risk). In stock market terms, this translates to high alpha and low beta. Often, the conservative investors choose the largest company (by market capitalization) in an industry sector to achieve their objective — stable returns with low risk. And the aggressive investors choose small caps in an industry sector, assuming higher rate of returns vs large caps.
This investment decision of conservative and aggressive investors is based on two assumptions. First, large cap stocks are relatively stable, and less risky. Second, small Cap stocks will give higher rate of returns as they grow to become mid-cap and then large-cap stock in the future. Both these assumptions are more often than not — inaccurate.
But do you know, there is a better option for both conservative and aggressive investors? This option is to choose the second largest company (or third largest company) in an industry sector. This can be a better stock pick, giving higher returns with minimum downside? We will explore this investment approach in the following post. Let’s get into it.