4 Small-Cap Stock Picks for When the Mag 7 Fall, According to a Pro
A Collaborative Approach to Small-Cap Investing
In an era where many asset-management companies rely on star portfolio managers to steer investment strategies, Wasatch Global Investors adopts a contrasting philosophy. JB Taylor, the CEO and a seasoned portfolio manager at Wasatch, emphasizes the importance of collaboration among analysts and managers within the firm. Headquartered in Salt Lake City with approximately $29.4 billion in assets, Wasatch employs a team-focused methodology in their twenty actively managed small-cap growth strategies.
Success Through Shared Knowledge
JB Taylor, who has been with Wasatch for 28 years and has led the Wasatch Core Growth Fund since 2000, attributes the firm’s success to its collaborative culture. The Wasatch Core Growth Fund holds a Morningstar five-star rating and boasts $4.2 billion in assets, returning an impressive 13.9% annually over the past fifteen years, far surpassing the Russell 2000 Growth index’s 10.9% performance.
The Allure of Small-Cap Stocks
Despite small-cap investing being out of favor lately, Wasatch is bullish on this sector. “We love the small-cap space because there are thousands of companies to choose from,” Taylor states. He aims to build a portfolio of 40 to 50 high-quality small-cap companies, focusing on sustainable growth and avoiding short-term trends. The firm meticulously identifies potential firms capable of doubling in size and revenue within a five to ten-year timeframe.
A Rigorous Selection Process
Wasatch applies a DuPont Analysis leveraging data from platforms like FactSet and Bloomberg to assess potential investments. This analysis focuses on factors such as net profit margin, asset turnover, and financial leverage to evaluate return on equity. Taylor explains that high-quality sustainable growth involves consistent and rising profit margins, ensuring that the selected companies can weather various market conditions.
Understanding Corporate Culture
Believing that corporate culture heavily influences performance, Wasatch invests time to gauge the strength of a company’s culture. Taylor opines that a positive corporate culture drives accountability and profitability while aligning employee goals with corporate objectives. To ensure comprehensive assessments, Wasatch employs a former investigative journalist to perform in-depth background checks of management teams.
Identifying Promising Investments
The conversation transitioned to highlighting specific companies that exemplify Wasatch’s investment criteria:
HealthEquity: A Leader in Health Savings Accounts
As the largest provider of health savings accounts in the U.S, HealthEquity is capitalizing on a growing market. The firm’s model allows employees to accumulate savings for health expenditures, making it a unique asset-light business with a strong management team and projected earnings growth of 15% annually.
Ensign Group: A Model of Operational Excellence
Operating within the skilled-nursing sector, Ensign has distinguished itself by acquiring and turning around underperforming nursing facilities. With a portfolio of around 300 facilities, Ensign is positioned to grow organically and through acquisitions, targeting a sustainable growth rate of over 15%.
BellRing Brands: A High-Rise in the Protein Shake Industry
As one of the largest manufacturers in the protein shake market, BellRing Brands is riding the wave of health consciousness among consumers. The business, primarily distributed through Costco, reflects solid management and the potential for 15% annual growth.
Why Investors Should Consider Small-Caps Now
With the “Magnificent Seven” technology stocks significantly outpacing the market, Taylor believes that the current environment offers small-cap opportunities that are overlooked. Given that small-caps haven’t been this cheap in 25 years, there is a compelling case for reallocation.
International Small-Caps: The Case for Global Investments
Discussing potential international investments, Taylor highlights India’s emerging economy as a fertile ground for small-cap investors. His successful investment in local paint companies such as Asian Paints demonstrates how the principles used in U.S. small-cap investments can be adapted globally.
The Economic Landscape and Small-Cap Growth
The recent interest rate cut by the Federal Reserve could indicate a softening economy, which may create more room for risk-taking in smaller caps. According to Taylor, Wasatch’s focus remains on the organic growth of their companies, presenting a mitigation strategy against potential economic shifts.
Conclusion
Wasatch’s focused yet collaborative approach to small-cap investing is rooted in a philosophy that prioritizes long-term growth, strategic corporate culture appraisal, and sustained engagement with their portfolio. By targeting high-quality small-caps globally, they are charting a path for investors seeking to capitalize on a changing market landscape.
