18 Jun 2024

Finding Hidden Gems: Investing in US Small Cap Equities

Investing is often about the search for hidden treasures, and US small cap equities are sometimes considered as hidden gems. These are stocks of companies with market caps between $300 million and $2 billion. They may not be household names, but they offer some unique opportunities for those willing to dig a little deeper.

Why Small Caps?

The important attraction is their earnings growth potential, which is the primary factor driving stock price over time. Small cap, even those already exhibiting strong fundamentals and earnings are companies often in early growth stages, giving them plenty of room to expand and capture market share. Historically, these stocks often outperform larger ones, especially during periods of strong economic growth or recovery from recessionary periods. At this time, on a relative price to earnings ratio basis, they present a multi-decade discount relative to large cap companies.  

Small Caps are Inexpensive Compared to Large Caps

Source: BofA US Equity & Quant Strategy, FactSet, VAM.
Data as of November 2023

Under-the-Radar Finds

Because they’re not as closely watched by Wall Street sell-side research analysts, the stocks of small companies can be overlooked, creating opportunities for savvy, focused investors to find real value. Historical data suggests that small cap stocks often outperform large cap stocks over the long term, particularly during economic recoveries and periods of robust growth.

The S&P 500 vs Russell 2000 – 12 Months Post-Recession

Average performance 12 months post-NBER Recession trough date (’80, ’82, ’91, ’01, ’09, ’20)
Source: Strategas Securities LLC. Past performance does not predict future returns. The price of shares can go down as well as up and may be affected by movements in the rates of exchange.

Accelerated Earnings Growth

What really sets some small cap stocks apart is their potential for accelerated earnings growth. These are the companies that are not just growing, but doing so at a faster pace than the broader market or index. Such accelerated growth can lead to significant stock price appreciation, offering returns that can far exceed those of the small cap index. Investors who identify these high-growth potential stocks can reap substantial rewards.

Portfolio Benefits

Adding small cap stocks to your portfolio can offer a number of benefits. This approach requires patience, research, and a willingness to embrace some risk. For those willing to venture off the beaten path, the rewards can be substantial, providing not only higher growth potential but also diversification benefits that can enhance overall portfolio performance. 

Adding Small Cap Exposure to Balanced Index Following Recovery Post-Pandemic

Performance since 18/03/2020 to 31/05/2024

US Small Cap Opportunities

Click on the below link where Robert Gordon, Director at VAM Funds shares his insights into opportunities in the US small cap sector and particularly the VAM US Small Cap Growth Fund, which is expertly managed by Chicago-based Driehaus Capital Management LLC.

He also talks on the power of earnings growth momentum and finding hidden gems, as well as, what makes momentum growth investing so special.

For more information, kindly contact us on marketing@vam-funds.com.

This is a Section 65 approved fund under the Collective Investment Schemes Control Act 45, 2002 (CISCA). Boutique Collective Investments (RF) (Pty) Ltd is the South African Representative Office for this Fund. Boutique Collective Investments (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002).

Disclaimer. VAM US Small Cap Growth Fund is a compartment of VAM Funds (Lux). This is a marketing communication. This document is intended for use by professional financial advisers only. The distribution of VAM Funds and the offering of the shares may be restricted in certain jurisdictions. Private investors should contact their financial adviser for more details on any of the products featured. It is the responsibility of any person in possession of this document to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdictions. Prospective applicants for shares should inform themselves as to the legal requirements and consequences of applying for, holding and disposing of shares and any applicable exchange control regulations and taxes in the countries of their respective citizenship, residence or domicile. Click for Important Information.