Small-cap bargains are widespread right now
The importance of learning from a downturn rather than overreacting to it cannot be overstated as there will always be inevitable periods of underperformance, says Forager Funds Management.
Speaking at a webinar, Forager chief executive, Steve Johnson, reflected on the performance of his International Shares fund which was down about 20% from its peak last year.
“That’s the first time that’s happened in the history of this fund and it’s probably emblematic of a fairly wild market out there,” he said.
“Under the surface, the individual stock movements have been far more significant than that.
“We got an email last week from J.P. Morgan taking a look at the Russell 2000 index of small-cap stocks in the US.
“It's also down about 20% from peak to current, but the average stock performance in that index is minus 39% from peak to current price, as of the 25th of January.”
He said some of the stocks he held in the fund had lost 50%-60% of their share price.
“I was sitting here in September regretting that we hadn't taken more money off the table at the 30th of June, asking ourselves a few questions,” Johnson said.
But by December, and particularly through January, Johnson said things started to get “very exciting” in terms of cheap stock prices.
The fund had returned 16% per annum since inception nine years ago, and while that number was expected to decrease as there was no guarantee that the market had bottomed out, Johnson said it was a far better entry point than six months ago.
“I know a lot of you have been watching this from the sidelines… [or] were sitting there in June of last year feeling like you’ve missed the boat, well this is the pullback that you’ve been waiting for,” he said.
“I’m putting a bit more of my own money into the fund this week and we’ve had a number of investors, both new and existing, adding to their investment over the last couple of weeks,” he said.
One of Johnson’s favourite examples of a stock that he wanted to continue to buy into was US online real estate company Fathom Holdings which was first purchased in 2020 at the initial public offering (IPO) stage.
“Back then, the company was half the size it is today and they had some big growth plans and an owner manager in that business that we thought was a good guy to back to grow the business a lot,” he said.
“The share price went from $10 at the IPO up to $50 and then all the way back to $12 in January this year.
“In the meantime, the revenue has more than doubled, the number of agents using its platform is up almost 100% and they are guiding next year some $400 million of revenue relative to a current market capitalisation of $200 million.
“This is still a young business and there still are lots of potential futures to unfold but it's less risky today than it was 12 months ago and we're buying it at almost the same price.
“These sorts of opportunities are pretty widespread out there at the moment in a small-cap land that has been pummelled.”
AUTHOR
Liam Cormican
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