News & Our Thinking

Ward Brown sits down with Argent portfolio managers Peter Roy, CFA, and Kirk McDonald, CFA, for a timely discussion about recent volatility in small and mid cap markets. Learn how they’re positioning their portfolios amid shifting valuations, and discover where they’re finding compelling new investment opportunities.

Transcript

Ward: Hi, I’m Ward Brown and I’m here with Peter Roy who runs our Focused Small Cap strategy and Kirk McDonald who runs our Mid Cap strategy and the two of them co-manage our SMID Cap strategy, that’s a mix of those two asset classes.

So, we wanted to talk to you today about some of the things that are going on in the universe of smaller companies. Coming into this year, there was a lot of optimism around some various initiatives that most investors thought were going to be really good for the smaller cap universe. We had a new administration that was going to be pro-business, there was hopes for lower taxes, there was hopes for deregulation, there was hopes for domestic initiatives that were going to be good for companies with most of their operations here in the USA.

And then we also had the Federal Reserve that had given us a 100 basis points in interest rate cuts that were also deemed to be good for smaller companies for various reasons. Now obviously that’s all been turned on its head in dramatic fashion since the highs in December.

You have the small cap index that’s down about 30% from the highs – it’s recovered a little bit. In mid cap, about 25% from those highs it’s the same way.

Kirk, how did you see that play out in your portfolio in the beginning of the year?

Kirk: The way that played out in the Mid Cap portfolio was any companies that we owned that had were perceived as having a significant amount of DOGE exposure, their stocks went down 40 to 50% and that was both consulting type companies and healthcare related businesses. So whereas companies that felt people felt were more insulated a little bit more, you know, removed from the tariff and the austerity threats, actually held in there pretty well.

Ward: That’s great. And Peter, for you small caps felt some of that even more pronounced. Your portfolios build with sort of the Enduring Business model to withstand that sort of ups and downs and through the cycle this sort of thing. As well as the diversification that has some exposure to some of that stuff and some without any exposure at all. How have you seen that play out in the portfolio?

Peter: Yeah, so when I think of how the Small Cap portfolio is positioned, I think we have a good mix of companies that exhibit defensive characteristics as well as ones that are perhaps a little bit more offensively oriented. A couple stocks that I’ll use as examples: ROI is more of a defensive stock. That’s a specialty insurance company that has a 30-year track record of generating an underwriting profit. Over three decades, they’ve obviously seen some ups and downs, plenty of business cycles, plenty of economic cycles, but they’ve always come out on the other side more resilient.

If you pair that or balance that with a more offensively oriented position, Onto Innovation is the stock that I’m thinking of. Onto is a semiconductor, capital equipment company that is more tied to the long-term trend of spend that’s going to build out the artificial intelligence ecosystem. And I think that that’s a a balance that we’ve seen across the Small Cap portfolio.

Ward: That’s great. And so one of the things that’s happened, of course, both from a performance and valuation perspective, is that smaller companies are now historically cheap by a lot of measures compared to large cap stocks and whenever you get a downside like we’ve had, of course, it’s not all that enjoyable, but these types of corrections are just a part of our business.

They happen. They always have. They always will.

But they do bring about various opportunities. How are you both thinking about some of the opportunities that you’re looking at coming out of this?

Kirk: Well, what we’ve been able to do in the mid cap space is take advantage of some of the names that really took a big hit to the stock price, and a recent addition to the portfolio was Manhattan Associates. And they sell software that helps companies manage their inventories and their warehouses, manage the logistics across the supply chain in terms of transportation and point of sale. And during an environment like this, where tariffs are on or potentially off, being able to manage that supply chain and make sure it’s resilient is incredibly important.

So Manhattan took a huge hit to its stock price, which we felt was a a bit overdone and we were able to add that to the portfolio. They just reported earnings last night that were quite good, so we’re very happy with that. And we just look for the opportunities that the market hands us.

Ward: Great.

Peter: Yeah, very very similar in small cap. I think as you mentioned, Ward, that that valuation gap between small caps and large caps continues to grow. The market is down, those declines have presented us with some opportunities both within the portfolio and from a new idea perspective. One of the new additions that we’ve made in the Small Cap portfolio is a healthcare company by the name of UFP Technologies. UFP makes consumable medical technology products that they sell to some of the larger, more well-known healthcare companies, such as Intuitive Surgical and Striker. UFPT has been on our watch list for well over a year. We’ve been researching the company for well over a year, and given what’s happened more recently in the market, we were able to establish an investment position.

Ward: That’s great, glad to hear it. Thanks very much for watching, we appreciate it.

Disclaimer: Performance returns cited represent past performance, which does not guarantee future results. Returns assume reinvestment of dividend and interest but returns do not reflect the effect of taxes and/or fees that an investment would incur. References to specific company securities should not be construed as investment advice. Not all Argent clients may own each company’s stock discussed. Argent portfolio managers may recommend the purchase or sale of these and other securities for their client’s accounts.  A list of all stocks recommended by Argent during the past year is available upon request.  Some data represented in this article is derived from non-affiliated sources Argent deems reliable. However, Argent does not perform any independent research to determine the accuracy of such information. Please visit our compliance page for additional details and disclaimers.