Small Cap Stock Performance

Market Performance and Recovery Trends

• Small-cap stocks outperformed large-cap stocks by approximately 30% since the market bottom in mid-March, compared to mid-20% gains for large caps.
• The small-cap growth segment specifically rose more than 35% during the same period.
• The 90% of revenues generated domestically by these companies is viewed as a dual benefit against a recovery anticipated to be stronger in the U.S. than globally.
• Investors are capitalizing on a "catch-up trade" following a period where small caps lagged large caps in 2018 and parts of 2019.

Sector Allocation and Risk Mitigation

• The strategy avoids sectors negatively impacted by the pandemic, including energy, smaller banks with closed-economy exposure, retail, hospitality, and general real estate.
• The portfolio is predominantly positioned in healthcare, technology, and consumer sectors, focusing on companies capable of maintaining or gaining market share during reopening.
• Consumer Digitization:
  • Investment focuses on digital fitness platforms that serve as community substitutes for closed physical gyms (e.g., CrossFit, Soul Cycle) with an expectation of complementary long-term growth.
  • EdTech holdings support school districts in transitioning to digital syllabuses, rubrics, and assessments, addressing administrative concerns regarding student evaluation and grade progression.
• Healthcare Innovation:
  • Companies are active in vaccine development and cold-chain packaging logistics for vaccine transport.
  • Significant capital is being pivoted toward therapeutics for treating COVID-19 and other respiratory illnesses.
  • Contrary to historical perceptions of cash constraints, many small-cap healthcare firms have increased cash reserves to fund these pivots.
• Technology and Security:
  • Digital transformation is accelerating, driven by the normalization of remote work and the need for "always-on" connectivity.
  • Demand is rising for cybersecurity and collaboration tools as Chief Information Officers increase discretionary budgets for disruptive status-quo technologies.

Investment Philosophy and Future Outlook

• Greg emphasizes the continued efficiency advantage of active, bottom-up stock picking in the small-cap space compared to passive investing.
• The strategy relies on deep, narrow analysis of company fundamentals, sales strategies, and capital allocation decisions to identify specific inflection points.
• Positive market reactions to good news from small-cap issuers are cited as evidence emboldening the team for future active management returns.