Top small-cap funds of 2017 focus on healthcare, tech in year ahead
26/12/2017 12:00
By David Randall
NEW YORK, Dec 26 (Reuters) - Healthcare, technology and
Japanese small-cap stocks look poised to outperform the broader
market in the year ahead, according to some of the best
performing U.S.-based stock fund managers of 2017.
Small-cap stocks should be among the largest winners of the
newly-signed Republican-led tax law, which slashed corporate
taxes at home and made it cheaper for companies to bring back
their profits from overseas. Yet small-cap fund managers from
Loomis Sayles, Federated Investors and Wasatch Advisors whose
funds are up 30 percent or more for the year say that a bigger
factor in the year ahead will be continued global growth.
"The tax bill is going to make some balance sheets look
better on the margin, but we think the larger factor is that the
recovery is still going on internationally," said Kenneth
Korngiebel, a co-portfolio manager of the $335-million Wasatch
Micro Cap WMICX.O fund, which is up 36.1 percent year-to-date.
That performance makes it the 13th best small-cap fund of the
year, according to Lipper data, which tracks about 1,800
small-cap funds.
As a result, Korngiebel is shifting more of his portfolio
into international stocks, which often trade at lower valuations
than their U.S. counterparts and have better growth
characteristics, he said.
Korngiebel is adding to stocks like Japanese outsourcing
company UT Group Co Ltd 2146.T , whose shares are up 243
percent for the year to date, and which he expects to grow its
revenue by more than 30 percent in the year ahead. He is also
adding to his position in U.S.-based Tabula Rasa Healthcare Inc
TRHC.O , which helps doctors screen for potential drug
interactions. Shares of the company are up 97 percent in 2017.
"The percentage of the population who take five or more
medication is going up and adverse drug events are expensive and
can lead to loss of life. What we see here is opportunity to
take advantage of an under-covered company that is unique and
meets a large need," he said.
Overall, companies in the small-cap benchmark Russell 2000
index pay a median effective tax rate of 31.9 percent, while the
larger, multinational companies in the S&P 500 pay a median
effective tax rate of 28 percent, according to Thomson Reuters
data. The median for the 30 mega-cap stocks in the Dow Jones
Industrial Average is 23.8 percent.
Some of the benefits of the tax cut are already reflected in
stock prices. The iShares Russell 2000 ETF IWM.P , which tracks
the benchmark Russell 2000 index .RUT of small-cap shares, is
up 14 percent for the year to date, with about half of that gain
coming over the last three months as Republicans rolled out
their tax plan.
John Slavik, a co-portfolio manager of the $18-million
Loomis Sayles Small/Mid Cap Growth LSMIX.O fund, the 16th best
performing small-cap fund this year, said that industrial
machinery companies such as Gardner Denver Holdings Inc GDI.N
should benefit if corporations reinvest part of their tax
windfalls into improving their factories.
The fund's largest position is in supply chain company XPO
Logistics Inc XPO.N , which Slavik expects to gain from both
corporate capital reinvestment and global economic growth.
Shares of the company are up 78 percent for the year, and now
trade at a trailing price to earnings ratio of 65.9, but Slavik
said that he expects its revenues and cash flow to accelerate as
the global manufacturing sector continues to expand.
"The valuation of the stock has been more challenging but we
still thinks it works into the future," he said.
He has also been selling his position in clear-braces maker
Align Technology Inc ALGN.O , whose shares are up 135 percent
this year and now trade at a market value of more than $18
billion, making it too large for his fund.
"This is a company that has done very well for us but we are
looking to start to redeploy that cash elsewhere," he said.
Stephen DeNichilo, a portfolio manager of the $872 million
Federated Kaufmann Small Cap FKASX.O fund, the 9th best
small-cap fund this year, said that fund holdings such as
plastics molding manufacturer Milacron Holdings Corp MCRN.N
will benefit from a pickup in capital spending because its
products help improve a factory's efficiency. "This kind of
investment pays for itself very quickly," he said.
Yet he has a larger position overall in biotech companies,
which have greater growth potential, he said. He has been adding
to his position in Nektar Therapeutics NKTR.O , which is
developing in abuse-proof opioid medication, and gene-therapy
drug maker Spark Therapeutics Inc ONCE.O .
He also added a position in retailer Floor & Decor Holdings
Inc FND.N shortly after its initial public offering in April
as a play on consumer spending on home renovation. Shares of the
company, which makes high-end floor tiles, are up 37.8 percent
for the year.
"This a traditional brick and mortar retailer that has built
a better mouse trap," he said.
(Reporting by David Randall; Editing by Nick Zieminski)
((David.Randall@thomsonreuters.com; 646-223-6607; Reuters
Messaging: david.randall.thomsonreuters.com@reuters.net))
Keywords: USA FUNDS/SMALLCAP