Toronto Firm Crushes Small-Cap Index With Virus-Proof Bets

Christel Deskins

Small-cap investors haven’t had an easy time in a market dominated by bigger companies, especially household names like Amazon.com Inc. and Apple Inc. Some smaller firms lack access to capital or have business models that just don’t fit with the times. Why own Cineplex Inc. when you can have Netflix […]

Small-cap investors haven’t had an easy time in a market dominated by bigger companies, especially household names like Amazon.com Inc. and Apple Inc. Some smaller firms lack access to capital or have business models that just don’t fit with the times. Why own Cineplex Inc. when you can have Netflix Inc.?

“They’re so recognizable, it just feeds on itself,” Ken Jesudian, the co-founder and chief executive officer of Toronto-based Crimson, says of the fascination with megacap U.S. tech companies. His Crimson Capital Growth Fund isn’t allowed to buy any of them; its focus is companies under $4.5 billion in market value.

Jesudian’s method is to look for the same attributes found in big-cap superstars — high margins, good balance sheets and pricing power — but in firms that are off Wall Street’s radar. When the pandemic hit and stocks sold off, Crimson’s staff did 70 calls with companies in six weeks, Jesudian said. They bought 14 new positions and added to some existing ones.

Among picks that have surged since the March selloff are furniture seller Wayfair Inc., bubble wrap maker Sealed Air Corp. and auto dealers Penske Automotive Group Inc.

They stand out at a time when the Russell 2000 — which trounced the S&P 500 over a two-decade span from 2000 through 2019 — has underperformed.

Wayfair, a Crimson favorite, was worth more than $10 billion in January and dropped as low as $2.2 billion in March, firmly in small-cap territory. Now it’s worth about $28 billion after the stock’s 12-fold rise from the bottom.

“The U.S. home is by far still the greatest, biggest asset class and they could benefit tremendously for years with this phenomenon of ordering home furnishing products from your living room,” Jesudian said in an interview.

Charlotte, North Carolina-based Sealed Air makes packaging materials that are in high demand with the rise in online orders. It’s up more than 140% from its March low.

The pandemic is also encouraging driving over public transit, providing a potential boost to auto dealers including Penske. Jesudian likes it because it’s diversified across different vehicle brands and lines of business. The stock has rebounded 161% since the March selloff.

Penske’s largest division is parts and service, which accounted for 36% of the company’s total gross profit, Bloomberg Intelligence analysts Kevin Tynan and Andreas Krohn wrote after the company’s second quarter results.

In the bigger picture, “we continue to feel that U.S. small cap equities are at a dramatic discount to the equities of U.S. large caps — especially those of big-cap tech,” Jesudian said.

The market is starting to pay attention to that idea. So far in October, the Russell 2000 is outperforming the Nasdaq 100 by the widest margin in nearly four years. Investors have the “best valuation entry point for small caps since March,” Bank of America strategists led by Jill Carey Hall said in a report this week.

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