All-time highs no bother for those playing in small and mid cap space

Note: This interview was taped on Monday 27 May 2024. 

Very busy

Qiao Ma says the ongoing strength in company earnings – particularly in the US - surprised the Munro Partners team. In her own words, they spent part of 2023 “scratching our heads”.

"Usually when you start to see interest rates going from zero to five, you start to see subprime and consumer loans and interest rates and mortgages all trickle down to spending behaviour", says Ma. 

"But what you ended up seeing is the economy being really resilient".

Whilst there are reasons for this – Ma points to 20-year fixed mortgages in the US and strong employment as factors – ultimately, markets kept rallying. Or, more specifically, the top end of the market kept rallying to fresh all-time highs. 

That has left a wealth of opportunity in the small-and-mid-cap (SMID) space – where Ma is lead portfolio manager for the Munro Global Growth Small & Mid Cap Fund – to pursue.

Ma measures the levels of opportunity by how busy her diary is and how many companies she has to see. Normally, when markets hit all-time highs, there’s not a lot of value to be had and not a lot of opportunity to chase.

This time? Her diary is full.

"Usually, when you see the market this high as a stock picker, I tend to have my schedule freed up quite a bit… but we are in a really funny period where the markets are making new highs, but it's propelled by a handful of really big stocks", notes Ma. 

"There is just a tonne of companies in the mid and small-cap space, but sometimes even large caps are trading quite a bit below their historical averages while the earnings growth is reaccelerating.

We are in this really great period, as growth investors, that everywhere we go, we see lots of opportunities." 

Performance drivers

Whilst Ma is finding plenty of opportunity, she still sees scope for SMID stocks to continue to perform strongly, given their ongoing underperformance compared to large caps.

"At some point, the gap has to narrow. That's just how markets work", says Ma. 

The gap has not worried Ma to this point, however, with the Fund up 38.6% since inception (cumulative—31 October 2023) to 31 May 2024. And whilst it’s only a short period, Ma acknowledges it’s nice to get off to a good start.

Before we talk stocks, Ma is keen to point out that the portfolio she manages will look vastly different (and therefore perform differently) to any SMID index, given it is highly concentrated on the best ideas she and the Munro team can find.

That said, there are three main realms in which they are seeking and finding opportunity;

1. Decarbonisation: "We own a number of small to mid-cap industrials companies that enable not just decarbonising the world, but also help very large industrial complexes to run in a very energy efficient way.
2. High-performance computing: "We've picked five to six, what we think, are the best in class smaller semiconductor companies. As the process of making semiconductors has become ever so complex, they also stand to benefit because they might be small, but they actually tend to be market share leaders in very niche processes that are needed to make these very complex AI chips". 
3. Consumer: The consumer has always been one of the top three areas of interest for the Fund. When we set it up, lots of investors gave us pushback, asking "How could you have five to six consumer companies in your portfolio when everyone is thinking consumers are going into a recession?" And it turned out our consumer companies did well because when we bought them, their valuations were just so low and the stock was so cheap. And it turned out that they just massively outgrew and outperformed their industries and gained market share".

Stock specific

Ma cites Wix (NASDAQ: WIX) and SharkNinja (NYSE: SN) as two stocks that have been big drivers of performance to this point. 

Wix is a website-building company, which Ma notes has a very high renewal rate, strong recurring revenues and free cash flow. 

Ma's interest in the company was piqued when the share price fell from $300 during COVID - when everyone was at home starting an online business - to just $80. Whilst Ma didn't pick it up at the lows - buying at around $120 (it's now at roughly $160) - she had done the math and realised that it was transitioning from a loss-making company to a solidly profitable one. Throw in AI, which is turbocharging Wix's ability to deliver customisable websites using simple commands, and the upside looks promising;

"Even at the current share price now, [Wix] is still less than 30 times earnings, growing free cashflow solidly in the mid-teens", says Ma. 

As for SharkNinja, which is up roughly 50% year-to-date, Ma adds that there has been some  testing of the blenders the company makes at the Munro offices; 

"We're all pretty obsessed with the Ninja products here at Munro", says Ma, adding that the kitchen counters are littered with Ninja appliances - which the team all love.  

As for the investment case, Ma notes it was a recent IPO, so it was operating under a Chinese parent company for quite some time. Then, it got re-listed as a purely US company selling to the US and European markets. 

"We did a lot of work on this company and we realised this is going to be at least a 10% grower, trading at 12x earnings, profitable, and with cash on the balance sheet", says Ma. 

It turns out the 10% earnings growth was conservative, with Ma noting "that they just started to report quarter after quarter of not just a 10% beat, but a 20-30% beat on earnings. "They just reported the first quarter results and have already upgraded the entire full-year guidance for 2024", adds Ma. 

What are you buying now?

If you want to know what Ma has been buying recently, make sure to watch the video above. You will also learn Ma's advice for investors in the current environment and her View From the Top. 

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