Top Small-Cap Manager Talks Strategy

Jeff Cardon, whose Wasatch Small-Cap Growth fund has beaten almost 90% of its peers over the past decade, recently discussed his strategy and market outlook with Morningstar.

Cardon says he’s keying on high-quality small-caps, which he thinks will fare better in a lower-growth environment than lower-quality peers. “Many companies that recently found success when capital and demand were strong will suffer in the low-growth economy that we are likely to face for at least the next several years,” he says. “The highest-quality companies, those with strong products and/or services, long-term growth opportunities, solid financing, and proven management, will pull away from the pack just like we saw in the technology sector post bubble.”

While small caps have far outpaced larger stocks over the past decade, Cardon says he’s still finding plenty of opportunities among the little guys. “We are in a period where the 10-year market return for small stocks is far below its historic average,” he says. “There are enough good valuations to fill up our portfolio, for sure.” He says he looks at a stock’s P/E ratio relative to its growth rate when assessing value. “If we can buy companies with good growth ahead — we look for companies that we believe can double during the next five years — and are trading at a P/E that roughly matches the expected growth rate, we believe we are well-positioned to capture price appreciation comparable to the company’s growth,” he explained.

Cardon says that there right now seem to be a greater number of inexpensive large-cap stocks compared to small caps, but adds, “The great thing about small caps, though, is that there are so many phenomenal innovators who have the ability to grow faster. That’s the true compelling case for investing in quality small-cap growth stocks; they can simply outgrow large caps year in and year out.”

Cardon also talks about why he’s high on India, and why he thinks his portfolio will remain focused mostly on U.S. stocks in the future.

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