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

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

CBA, AUSTRAC and our Orwellian privacy laws

Imagine receiving an email from your bank demanding to know if you keep cash at home and threatening to freeze your accounts if you don't respond in seven days. This happened to me and it raises disturbing questions. 

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 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.