Josh Bennett, senior portfolio manager and director of research at Alger, joins Julie Hyman and Josh Lipton on Market Domination to discuss how to play small-cap stocks during the rate-cutting cycle.
“We think the setup is pretty good for small caps now… The fact is, as the easing cycle begins, we should see that as favorable for small caps,” Bennett says, adding, “Historically, you’ve seen small caps trade at about a 10% premium to the large-cap index.” He highlights that “small caps just off 20-year lows in terms of relative valuation to large-cap stocks. So valuation setup is interesting.”
The portfolio manager says that while it does look like the economy is on the way to a soft landing if we were to enter a recessionary period, there are small stocks that can weather a challenging macro. “Small is not weak. And I think that it’s interesting. A lot of people think that small-cap companies don’t have the strength, but when you look at where we operate in the small-cap segment, we’re looking for the highest quality small-cap growth names that we can find.”
Bennett names Ollies, a closeout retailer, as a buy in the small-cap space. “They’re the largest player in the closeout industry. This is an enormous industry. $300 billion in closeout, and over $200 billion of that is non-apparel, which is where Ollie’s plays. So they don’t compete with TJX. They don’t compete with Marshall’s… Why is Ollie’s a buy now? Because the consumer is looking for value more than they ever have before.”
The portfolio manager also calls on RXO, a truck brokerage company that uses artificial intelligence (AI) to optimize its network, which connects trucks with companies that need to move things. “RXO should benefit as the industrial cycle begins to pick up. They’ll see that benefit.” Bennett notes that if there are supply chain disruptions from the potential port strike, RXO could gain.
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This post was written by Naomi Buchanan.
