PORTFOLIO SPOTLIGHT
“ If I were a betting man I ’ d bet very heavily that over the next 10 years small caps will outperform large caps . And micro caps as a subset should do particularly well compared to large caps .”
— Ken Farsalas
being pumped by the government into that marketplace .”
In addition , he notes , Blue Bird stands to benefit from Environmental Protection Agency regulations aimed at toughening emissions requirements for school buses starting in 2027 .
“ That should create additional demand for school buses that run on propane , which is a much cleaner fuel ,” Farsalas says , adding that Blue Bird is a top player in that space .
He says his fund bought Blue Bird when its price was in the low twenties . Since then it has reported a string of earnings surprises and its stock traded north of $ 58 as of early June .
It ’ s clear that Blue Bird ’ s stock is no longer a secret . “ When we ’ re right , and we ’ re not always right , what happens over time is that the earnings gap — the delta between our estimate and the Street ’ s consensus estimate — should narrow ,” Farsalas says .
That usually coincides with the stock going up in price and with Wall Street analysts reviving their earnings expectations upwards . And as that earnings gap starts to narrow , the misunderstanding about
Portfolio Statistics
Number Of Stocks 83 Average Mkt . Cap
$ 1.35 billion P / E Ratio 17.63x Std . Dev . Fund / Benchmark 26.25 / 22.14 Turnover Ratio 58 % Net Expense Ratio 1.28 %
Portfolio stats as of 3 / 31 / 24 . Standard deviation ( three-year period ) versus the Morningstar U . S . Small Cap Broad Growth Extended Total Return Index . Sources : Oberweis Asset Management and Morningstar . the business starts to narrow and go away . “ As that misunderstanding starts to whittle away , that ’ s when we want to reduce the position size in the portfolio ,” he says .
Time To Rally ?
In April , Morningstar noted in an article that small-cap stocks returned 48 % while large-cap stocks returned 92 % over the past five years ( as of this year ’ s first quarter ). The article laid the blame for small caps ’ underperformance on persistently high interest rates , since small companies typically need to borrow money to fund their operations . The massive gains in mega-cap tech stocks have meanwhile diverted attention away from smaller-cap companies , Morningstar said .
Farsalas says that small caps are better bargains at their current prices than large caps to a degree not seen since the late 1990s . “ When does the gun go off and things revert to the mean ? It ’ s hard to say , but historically when you have this type of differential between the two it does revert to the mean ,” he says . “ If I were a betting man I ’ d bet very heavily that over the next 10 years small caps will outperform large caps . And micro caps as a subset should do particularly well compared to large caps .”
He opines that micro caps are the more interesting part of the small-cap universe because they get less Wall Street research ; what they do get can add value and generate alpha . He acknowledges that micro caps in general are riskier , but with risk comes reward when used properly . That means they are best used as part of a core / satellite approach within investment portfolios where the bulk of the equity sleeve is going to the larger-cap part of the market , something that ’ s well covered and more efficient .
“ If you have a passive core and want satellites around that where you can add alpha , micro cap [ is ] a great option in an active-satellite bucket ,” Farsalas offers .
He says an uptick in flows during the past two years have boosted his fund ’ s asset base over $ 500 million . This suggests that some investors are warming to the notion of trying to find big things in small packages .
2024 INDEPENDENT BROKER-DEALER REVIEW AND RANKING
The Results Are In
SPONSORED BY
ADVISOR PHOTOGRAPH COURTESY OF OBERWEIS ASSET MANAGEMENT JULY / AUGUST 2024 | FINANCIAL ADVISOR MAGAZINE | 53