Forward price-earnings multiples for small-cap stocks have been this low only twice in the last 20 years.
Small-cap stocks have taken it on the chin recently.
The Russell 2000 Index of mostly small-cap stocks has slid 10.2% in the last six months, almost doubling the 5.4% decline for the Russell 1000 Index of mostly large-cap stocks.
Part of that reflects “outright risk aversion since the New Year,” Cormac Weldon, manager of U.K. money manager Artemis’ U.S. Smaller Companies fund. That would include reaction to the Russia-Ukraine war. “But periods of outright risk aversion tend to be brief,” he said.
“Once risk aversion abates, we would expect small-caps to outperform: fundamentals and growth will eventually prevail over sentiment.”
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Domestic Companies Will Benefit Now
As many small companies don’t have any activity overseas, they’re largely insulated from what happens there. These companies are more tied to the domestic economy.
“At a time of turbulence in the global economy, the U.S. economy appears to be in a good position, helping stocks with a domestic focus,” Weldon said. “[The Organization for Economic Cooperation and Development forecasts the U.S. economy will grow by] a very strong 7.8% [this year],” he said.
That bodes well for small companies.
“The U.S. is unusually rich in innovative, rapidly growing smaller and medium-sized business,” Weldon said.
Valuations also are attractive, he said. Forward price-earnings multiples for small-cap stocks have been this low only twice in the last 20 years: During the 2007-09 financial crisis and the early stages of the pandemic.
These Stocks Look Good Right Now
Weldon’s fund is overweight growth and quality. He mentioned several smaller stocks that he likes. One is Planet Fitness (PLNT) – Get Planet Fitness, Inc. Class A Report, a fitness center chain.
“It makes gym-going more affordable and less intimidating to newcomers,” Weldon said. He cut his exposure to the stock during the pandemic, as gyms suffered. But his fund has bought again, “as disruption caused by Covid begins to be consigned to the rear-view mirror.”
Another Weldon pick is Pool Corp. (POOL) – Get Pool Corporation Report, which sells swimming pool supplies. It has “established a dominant position in the market” with organic growth and acquisitions, he said.
“Moreover, during the crisis people used their savings — and filled their time — by installing swimming pools,” he said. Many people are moving to the South, where pools are more attractive, Weldon noted.
Weldon also favors Maravai LifeSciences (MRVI) , which provides products like nucleic acid to develop drug therapies, vaccines and diagnostics.
“It is well-positioned to take advantage of the massive influx of interest and investment flowing into the mRNA area, as well as growth in the cell and gene therapy space more broadly,” he said.
Weldon also mentioned Bio-Techne TECH, which sells science instruments. It’s “already highly profitable but is growing its sales at around 20% per annum,” he said. “The story with Syneos Health (SYNH) – Get Syneos Health, Inc. Class A Report is similar.” It provides biopharmaceutical outsourcing.
Weldon said he also likes cyclical financial stocks, such as Signature Bank (SBNY) – Get Signature Bank Report, without elaborating about that company.
