By Barbara Kollmeyer
Critical information for the U.S. trading day
Too soon. That's the general Wall Street verdict when it comes to investing in small-cap stocks, dogged by under performance since 2019 amid higher interest rates and growth-stock fever.
The latter is clearly not ebbing, as Nvidia cements cult status among investors with a market cap bigger than Apple's.
But in our call of the day, Kornitzer Capital Management's Chris Carter flags some bargains that are being overlooked in the small-cap world. The portfolio manager for private clients looks after $400 million-plus at the Mission, Kansas-based firm.
He is also a former Buffalo Mid Cap portfolio manager, and recalls a savvy decision in the first quarter of 2020 when valuations were high and COVID started to hit China. A trim of cyclical positions at the right time led to his best-ever quarter.
Fast forward, and he's finding "pretty attractive" valuations for small caps, especially given the years-long underperformance. He also looks for high-quality businesses generating high margins and positive free cash flow.
And with around 40% of Russell 2000 RUT companies lacking free cash flow, that's a tall order, he says. Many have higher-on-average leverage, more debt and pay higher rates on shorter-end maturities, and thus are more interest-rate sensitive. Often earlier in their life cycle, they also have high capital-spending needs and lower margins.
"We're looking for positive free cash flow...companies that aren't capital intensive, that have competitive moats that have proven they can grow over time," he says, adding that they also need to be in the top quintile of free cash flow margin.
MarketAxess (MKTX), an electronic trading platform for fixed income, is one company that makes the cut for Carter. Much of its revenue is generated on corporates, with a third of that international and it only has one big competitor, TradeWeb Markets (TW), he says.
"More than half of that market is still traded by phone or voice or on Bloomberg through messaging, and so there's still a lot of market share to gain there. They've been growing over the past decade in recent years," he said. The rate environment has been a headwind for bond platform MarketAxess, but he sees a "secular opportunity" intact, on the view electronic trading will continue to grab share from the old methods in the next decade.
His next pick is Bio-Techne (TECH), a biopharma group that supplies life science equipment and services.
Bio-Techne has been hurt by pharma budget tightening post-COVID, and some venture-capital funding that has come into biotech markets has also softened in the last two years, though Carter doesn't see that lasting.
"Their products represent maybe 1% to 5% of the cost of running a study, and so quality becomes a focus over price, and they've been able to lead with the best quality and take price in their market and maintain kind of a leading market share," he said.
Bio-Techne has been in client portfolios in 2010 and MarketAxess since 2009, and he has been adding both to existing positions and as new investments for client accounts this year.
Match Group (MTCH), which owns an array of dating apps including Tinder and OkCupid, is another favorite for him. He picked up shares last year, and Match also went through a COVID boom that faded, but he notes its secondary product, Hinge, which focuses on those looking for forever partners.
Carter sees Match well placed given online dating is the "number-one way people meet and connect," at a time when people have become more isolated and social connections are vital.
The wealth manager says rate cuts would be "gravy" for some of his companies, but he's not hanging any bets on Fed action. Carter notes that large cap and dividend-paying companies do play a bigger role for his clients. One solid bet they've made, he said, is holding Meta (META) through 2022 and then adding to it.
The markets
Stock futures (ES00) (YM00) (NQ00) are steady, along with Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y, with crude oil (CL.1) and gold (GC00) also inching up. Follow MarketWatch's Live Blog.
Key asset performance Last 5d 1m YTD 1y S&P 500 5354.03 1.65% 3.21% 12.25% 25.46% Nasdaq Composite 17,187.90 1.58% 5.43% 14.50% 31.16% 10-year Treasury 4.295 -26.10 -16.50 41.41 57.51 Gold 2380.9 1.88% 2.80% 14.92% 21.75% Oil 74.4 -6.16% -6.08% 4.30% 2.68% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
Weekly jobless claims, revised first-quarter productivity and the U.S. trade deficit are all due at 8:30 a.m. Also ahead, the European Central Bank is expected to deliver a 25 basis-points rate cut.
A day after the AI chipmaker's market cap swelled to just over $3 trillion, Nvidia shares (NVDA) are up.
Lululemon shares (LULU) are surging after the athleisure maker bumped its buyback program by $1 billion and lifted its outlook. Five Below (FIVE) is dropping after the retailer cut its forecast.
The FTC has reportedly opened an investigation into Microsoft's (MSFT) deal with startup Inflection AI.
Some Berkshire Hathaway (BRK.A) (BRK.B) investors who tried buying the dip during Monday's glitch ended up with full-priced shares.
Best of the web
U.S. clears way for investigations of Nvidia, Microsoft and OpenAI.
Nvidia CEO is something of a workaholic. Surprise.
How Apple fell behind in the AI arms race.
Goldman sees 'wall of money' fueling stock market's summer party
Top tickers
These were the top-searched tickers on MarketWatch:
Ticker Security name GME GameStop NVDA Nvidia AMC AMC Entertainment TSLA Tesla NVAX Novavax NIO Nio TSM Taiwan Semiconductor Manufacturing AAPL Apple AMD Advanced Micro Devices PLTR Palantir Technologies
The chart
Retail inflows into Nvidia picked up after last month's announcement of a 10-for-1 stock split - taking effect after Friday's close - but have since waned, notes a Vanda Research team.
What's ahead? Vanda notes that in 2020, Apple and Tesla stock splits triggered big retail inflows between the announcement and ex-date, boosting prices before "eventual sell-the-fact flows." And those investors appear to be "front-running this playbook as well," says Vanda, who expect Nvidia to slump on the split, then recover three to four weeks later.
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-Barbara Kollmeyer
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06-06-24 0719ET
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