Most are familiar with the phrase “a rising tide lifts all boats.” In the current market, the “rising tide” is actually just a few large and highly profitable companies that account for almost all of the economic earnings growth in the market. Meanwhile, many flashy, yet low-quality companies, see their valuations reach unrealistic levels, while the steady, more consistent firms get overlooked.

In August 2018, we grouped many of these low quality companies into Micro-Bubbles, or groups of stocks with extraordinary risk within an overall market that is not nearly as overvalued. We deemed these stocks as overvalued because their valuations assumed they would take significant market share away from the highly profitable incumbents in their industries. As a result, these incumbents are undervalued by the market despite their large and growing cash flows. When the micro-bubbles burst, these incumbents stand to benefit.

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