Small Caps are Back.

Thematic longs.

Last weeks article of the week is here, it’s worth a read.

This is a quick follow-up to the Saturday piece “Event Driven Investing” above.

What I try to do as a portfolio manager is be opportunistic across asset classes and sectors because I believe in an Absolute Return approach to investing.

It’s what I did when I first started in this business and it’s where I feel “most at home” - finding companies and situations that lead to outsized gains by digging into themes and understanding the drivers.

What the market sees right now is Trump tax cuts for corporations, among other deregulation, that will lead to a more favorable environment for companies, small caps especially.

Companies in the Russell 2000 (which has been dead weight for years) generate nearly +90% of their sales in North America (source: Bloomberg) which means there’s a theme there brewing.

The downside is that roughly 40% of companies in The Russell 2000 lost money over the last 12 months.

This situation is good for active managers like myself and the approach I employ because it means there’s opportunity for 2-3 baggers and, if you read the article last week, why I could care less about the market at large when there are themes like this, and others, brewing.

It’s themes like this that allow us to run a Top Down framework first.

That same Top Down framework led me to look at inflation-linked ideas in the Summer of 2024 and I honed in on WPM 0.00%↑ (one of many) as one to buy.

Some of these select small-caps in 2025 are not only going to appreciate in share value but some also have attractive dividends, so you get 2 for the price of 1 and we like that.

In fact, WPM 0.00%↑ had that theme too: strong dividend + buybacks + a macro theme driving the idea.

The Wisdom Tree US Small Cap Dividend ETF is already pressing after last week.

Then we had HIMS 0.00%↑ - which was flagged in the report 2 months ago up nearly +80% since then and nearly +20% today alone.

Another thematic idea which has turned into, likely, a longer-term position.

And a congrats to those who read and listen - you’ve done very, very well the last two months off that Idea alone and I expect Cigars as a tip for Christmas this year (I like Opus X by Fuente : ) - the first trade last month was good for +112% on the DITM options and this last trade, the one closed today, was good for nearly that as well.

To the extent that the S&P500 is in a bubble, which is not a concern of mine, I think we could be at the precipice of a long-period of outperformance in small caps.

That’s good for active managers like myself because (and these are Champagne problems) most of the positions this year have lasted less than 3 months because they appreciated “too fast” - which makes portfolio turnover higher.

Again, that’s not a big problem, and a good problem to have, but I’d like to put on positions where I can get to full portfolio risk and let them appreciate over 6-18 months. TEO 0.00%↑ (which was also flagged) moved so fast on me a month ago that I could never get the full risk on that I wanted.

Again, champagne problems, but the tide is turning for Small Caps to take off in 2025.

Finally, the valuation difference in small and large caps has hit extremes and I said it back at the start of the third quarter here that I thought many large cap tech would normalize.

So, while I think the market at large does well next year, the real alpha comes from small-caps, Japan, LatAm and other select mid-caps; that’s where I earn my performance fees - not by indexing clients into mutual funds, the SPY 0.00%↑ and selling them annuities: by doing the work most are too lazy to do.

Dan