Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 540

It's time small and mid-caps play catchup

  •   Qiao Ma
  •   20 December 2023
  • 2
  •      
  •   

2023 had been a strong year for the share performances of large technology companies. The Magnificent Seven tech stocks - Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), Nvidia (NVDA), Meta Platforms (META) and Tesla (TSLA) drove the bulk of market returns for the S&P 500.

Looking forward to 2024, we see many opportunities for smaller, less discovered companies. At Munro, we believe that stock returns follow a company’s earnings trajectory over a long time horizon, and we search all over the world for sustainable earnings growth. We are now observing earnings growth re-acceleration in many high-quality small companies.

Fortuitously, these companies are also ‘on sale’ – in our opinion these companies are cheap both relative to their own historical average valuation and their larger peers.

Why Generative Artificial Intelligence will start to benefit smaller companies too

Generative AI is a revolutionary tool, and so far, it mostly benefits the largest companies. The simple reason is cost – it takes over US$1 billion to train a large language model, so very few companies can afford it. However, 2024 is when these models are finishing the initial ‘training’ phase and entering the ‘inferencing’ realm, which is another way of saying now the world will try to generate real use cases from these staggeringly intelligent models.

Few companies outside of the Magnificent Seven can enjoy their fruits during the model training phase. During inferencing, however, anyone can benefit from them. This is an Appstore moment for Gen AI, and we expect to see a sharp increase in the number of smart, entrepreneurial companies racing to incorporate AI more deeply into their products and services.

Pinterest

An example of the kind of company we like is ‘visual discovery engine’ Pinterest (PINS). It had been labelled as a ‘boring’ legacy company, but we have observed how they have reinvented themselves into something much more exciting.

They brought in a stellar management team from Google and transformed Pinterest from a website for browsing pretty pictures to an incredibly shoppable interface on both the mobile app and their webpage. We are seeing many positive early results – user growth has re-accelerated, revenues are growing strongly again, and margins have expanded substantially. The stock jumped 20% on the recent positive earnings announcement, and we think this is just the start.

Area of Interest - Consumer

Activewear and outdoor living sportswear brands are a subsector of broader consumption which is becoming more of a focus for us. In our all-cap funds, we like companies like Lululemon, and in the small and mid-cap funds, we currently own On Running (ONON).

On Running

On Running started up 13 years ago in the Swiss Alps by a retired athlete who wanted to create a running shoe with a new feel. It is a small, specialised brand pulling ahead of the pack. It is also not as impacted by the range of macro factors hitting the market as it has a very specific set of devoted target customers to which it can sell a differentiated product.

We were able to add the company to our portfolio at, what we consider to be, a very attractive entry point, potentially its lowest valuation since the initial public offering (IPO), because at the time, the share price was being impacted by overall market macro concerns around consumer stocks.

It was encouraging to see that reported earnings for the financial year far exceeded expectations. The outlook for On Running is also looking very positive with a slew of innovative products in the pipeline.

 

Qiao Ma is a Partner and Small-Mid-Cap Lead Portfolio Manager for Munro Partners, a specialist investment manager partner of GSFM Funds Management. GSFM is a sponsor of Firstlinks. The information contained herein reflects the views of Munro Partners as at the date of publishing and is provided for informational purposes only. It should not be considered investment advice or a recommendation of any particular security.

For more articles and papers from GSFM and partners, click here.

 

RELATED ARTICLES

Reports of tech's death are greatly exaggerated

Global consumer and corporate resilience surprises everyone

Opening Gates: AI is as revolutionary as the internet

banner

Most viewed in recent weeks

Vale Graham Hand

It’s with heavy hearts that we announce Firstlinks’ co-founder and former Managing Editor, Graham Hand, has died aged 66. Graham was a legendary figure in the finance industry and here are three tributes to him.

Australian stocks will crush housing over the next decade, one year on

Last year, I wrote an article suggesting returns from ASX stocks would trample those from housing over the next decade. One year later, this is an update on how that forecast is going and what's changed since.

Avoiding wealth transfer pitfalls

Australia is in the early throes of an intergenerational wealth transfer worth an estimated $3.5 trillion. Here's a case study highlighting some of the challenges with transferring wealth between generations.

Taxpayers betrayed by Future Fund debacle

The Future Fund's original purpose was to meet the unfunded liabilities of Commonwealth defined benefit schemes. These liabilities have ballooned to an estimated $290 billion and taxpayers continue to be treated like fools.

Australia’s shameful super gap

ASFA provides a key guide for how much you will need to live on in retirement. Unfortunately it has many deficiencies, and the averages don't tell the full story of the growing gender superannuation gap.

Looking beyond banks for dividend income

The Big Four banks have had an extraordinary run and it’s left income investors with a conundrum: to stick with them even though they now offer relatively low dividend yields and limited growth prospects or to look elsewhere.

Latest Updates

Investment strategies

9 lessons from 2024

Key lessons include expensive stocks can always get more expensive, Bitcoin is our tulip mania, follow the smart money, the young are coming with pitchforks on housing, and the importance of staying invested.

Investment strategies

Time to announce the X-factor for 2024

What is the X-factor - the largely unexpected influence that wasn’t thought about when the year began but came from left field to have powerful effects on investment returns - for 2024? It's time to select the winner.

Shares

Australian shares struggle as 2020s reach halfway point

It’s halfway through the 2020s decade and time to get a scorecheck on the Australian stock market. The picture isn't pretty as Aussie shares are having a below-average decade so far, though history shows that all is not lost.

Shares

Is FOMO overruling investment basics?

Four years ago, we introduced our 'bubbles' chart to show how the market had become concentrated in one type of stock and one view of the future. This looks at what, if anything, has changed, and what it means for investors.

Shares

Is Medibank Private a bargain?

Regulatory tensions have weighed on Medibank's share price though it's unlikely that the government will step in and prop up private hospitals. This creates an opportunity to invest in Australia’s largest health insurer.

Shares

Negative correlations, positive allocations

A nascent theme today is that the inverse correlation between bonds and stocks has returned as inflation and economic growth moderate. This broadens the potential for risk-adjusted returns in multi-asset portfolios.

Retirement

The secret to a good retirement

An Australian anthropologist studying Japanese seniors has come to a counter-intuitive conclusion to what makes for a great retirement: she suggests the seeds may be found in how we approach our working years.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.