{"id":497291,"date":"2024-11-26T13:01:00","date_gmt":"2024-11-26T18:01:00","guid":{"rendered":"https:\/\/www.investmentexecutive.com\/?p=497291"},"modified":"2024-11-22T13:47:28","modified_gmt":"2024-11-22T18:47:28","slug":"transcript-a-broadening-of-markets-will-be-positive-for-small-cap-stocks","status":"publish","type":"post","link":"https:\/\/www.investmentexecutive.com\/soundbites\/transcripts\/transcript-a-broadening-of-markets-will-be-positive-for-small-cap-stocks\/","title":{"rendered":"Transcript: A broadening of markets will be positive for small-cap stocks"},"content":{"rendered":"

Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today\u2019s Soundbites, we\u2019re talking about opportunities in global small cap with <\/em>Francis Gannon, co-chief investment officer<\/em> with Royce Investment Partners<\/em>. We talked about the impact of falling rates, names and sectors he likes, and we started by asking how he expects small caps to finish the year.<\/em><\/p>\n

Francis Gannon (FG):<\/strong> The third quarter saw a nice reversal in small cap. It was the first quarter since the fourth quarter of last year where you saw small caps outperform. Post the U.S. election, small caps have really picked up. And, in fact, if you look at the one-year numbers now for the Russell 2000, it’s outperforming the Russell 1000, the S&P500, and even the NASDAQ. I do think we are on the cusp of what could be a pretty significant regime change in the United States around small caps. Small caps have underperformed on a relative basis to large cap for a while. They are quite inexpensive on a valuation standpoint, if you look at them relative to large. I think that over the next one-, three- and five-year period, you’re going to see small caps outperform as the market tends to broaden out. We’ve also seen that we are in a very low return period for small caps over the past three years. And typically, when you see low returns and small caps are out of favour, the next several years tend to be quite strong.<\/p>\n

The surprising consistency of small-cap stocks<\/strong><\/p>\n

FG:<\/strong> The small-cap asset class, as measured by the Russell 2000, hit a peak on Nov. 8, 2021. The thought was, at that time, that we would see a recession in the United States. And small caps priced in a recession right away. But as you know, the recession never came. And we have been fighting out of that moment since then. We have had some difficult periods on earnings recently. I think we’re getting to the point of an inflection, where you’re going to start seeing small-cap earnings start to outperform large-cap earnings, and many of the trends that have been in place are really going to be amplified, perhaps, post the election around deglobalization, reindustrialization in the United States. And I think these are two major trends that are really going to benefit a lot of small-cap companies.<\/p>\n

Where he sees headwinds for small caps.<\/strong><\/p>\n

FG:<\/strong> The biggest headwind has been that we haven’t seen that earnings growth. But I do see that changing. I think people have been on hold until they’ve had a better direction around two things. One is the Federal Reserve, which we now know has begun easing. And two, has actually been the election. I think corporations have clarity now in terms of what tax policy and what the platform of the incoming president might be, and therefore they can act accordingly. And, so, I think you’re going to see the earnings profile continue to improve within the small-cap space.<\/p>\n

Tailwinds on the horizon?<\/strong><\/p>\n

FG:<\/strong> One is the fact that they’re simply out of favour, right? Small caps are so underowned, I think, that any rotation out of the upper end of the market into the lower end of the market \u2014 a broadening of the overall market \u2014 will be helpful to small caps. From a business standpoint, or an operating standpoint, I think the trend to reindustrialize the United States, reshore in the United States, is something that I think is pretty significant. And I think the election of Mr. Trump has proven to be a bit of a spark for small caps. Many of his policies could accelerate some of the reshoring and reindustrialization that we’ve been talking about.<\/p>\n

Names he’s watching.<\/strong><\/p>\n

FG:<\/strong> There’s a retailer that was started in Texas that has about a $3.5 billion market capitalization by the name of Academy Sports [Katy, Tex.-based Academy Sports + Outdoors]. It is the second largest sporting goods retailer in the United States, with about 290 stores and growing. They’ve been able to generate very consistent return on invested capital, some very consistent cash flow numbers, and their balance sheet is in phenomenal shape. And it’s just been a wonderful opportunity for us to buy what we think is a very high-quality retailer at what has been a really good price.<\/p>\n

And finally, what’s the bottom line on small cap investing in the current moment?<\/strong><\/p>\n

FG:<\/strong> I think the bottom line for small caps in the United States today is that they represent great opportunity. They have, for all intents and purposes, been a forgotten asset class. They are one of the last inefficient asset classes out there. And where you see such great concentration in the overall market, what tends to happen is the market broadens out. And the relative performance of small versus large increases pretty dramatically. And I think we’re at that same moment in time today. So, we’re on the cusp of what could be a regime change. We know that small-cap cycles \u2014 when they start \u2014 they last for more than a decade. And I would say that we’re at the beginning of what could be a very positive period of time for small caps.<\/p>\n

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Francis Gannon of Royce Investment Partners. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.<\/em><\/p>\n

**<\/em><\/p>\n

Go back to<\/em> the article.<\/u><\/em><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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