Small Cap Market Tilt: More Tailwind For Hot AMG Stock Mutual Fund?

Already performing well this year thanks to leading stocks like PGT Innovations (PGTI), Kinsale Capital Group (KNSL), MCBC Holdings (MCFT) and Medifast (MED) — which are up 10% for PGT to 70% for Medifast — small-cap growth $121.8 million AMG Managers Cadence Emerging Companies Fund’s (MECIX) managers see the market environment tilting more their way — more in favor of small-cap stocks.


“I would say the environment is friendly toward small-cap strategies right now,” said Bob Fitzpatrick, a manager of the fund along with Michael Skillman and Robert Ginsberg. “Small caps can do well in a rising interest rate environment. Also, we have a focus on quality stocks, which are stocks that are less leveraged and more profitable. In this environment, quality stocks should see strong earnings growth, demand (for their products and services) benefiting from corporate tax cuts and rising M&A.”

The fund managers are also counting on their valuation discipline to stay ahead of most rivals. “Our disciplined process is a conservative growth strategy,” Fitzpatrick said. “As a more conservative growth fund, we differ from rivals that have a more aggressive approach.”

As a result, GARP, or growth at a reasonable price, is a fair label for this portfolio’s investment approach, Skillman says. “We’re looking for growth, quality and valuation,” he said. He added, “The price you pay determines your investment experience. It also provides downside protection, which can be important since smaller, rapidly growing companies can be volatile. It’s also part of your offense. It can boost multiple expansion.”

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Going into Thursday, the fund’s approach has it outperforming the S&P 500 year to date as well as over the past one, three, five, 10 and 15 years.

Small-Cap Strategy

The fund’s focus often takes the portfolio into unexpected areas. “We have good weightings in industrials and financials, which are not typical growth-manager sectors,” said Fitzpatrick. He and his teammates are with Cadence Capital Management, subadvisor for this fund.

PGT Innovations makes residential doors and windows. Earnings per share grew 80% and 171% the past two quarters.

“They make impact-resistant doors and windows, and they’re based in Florida,” Fitzpatrick said. “About 90% of their revenues are in Florida. The most recent storms heightened awareness of the need for protection against wind damaged and blown-out windows. That segment of the market is growing faster than the housing market. And it’s growing faster than its category. They’re facing some cost pressures like many companies, but they’re executing well on their margins and they’re deleveraging.”

Specialty Insurer Kinsale

Kinsale Capital, which is a specialty insurer, is one of the fund’s financials. EPS grew 13% and 31% the past two quarters. “They operate in a niche of the insurance industry called ‘excess and surplus,’ ” Fitzpatrick said. “They underwrite hard-to-place risks, like a small business that has an adverse claims history.”

The company combines its niche focus with a strong management team. Fitzpatrick said, “They also have a strong technology platform that they view as a competitive advantage. It improves their underwriting accuracy, speed and efficiency.”

Skillman added, “It enables them to undercut costs of rivals by as much as 20%.”

IBD’S TAKE: Kinsale Capital is ranked No. 1 in IBD’s Insurance-Property/Casualty/Title industry group thanks to traits like four years in a row of earnings per share growth and 58% projected EPS growth this year. Learn more about how Kinsale stacks up against rivals in IBD’s Stock Checkup feature.

MCBC Holdings, another industrial, makes recreational boats. EPS grew 17%, 7% and 62% in the past three quarters.

“They participate in the sports boat segment,” Fitzpatrick said. “That segment is growing faster than the overall boat market.” MCBC watercraft are popular among boaters who are young enough to enjoy wakesurfing, a sport in which a rider trails a boat, riding the steep face of the craft’s wake. It’s like surfing, using a boat to create a wave.

“Wake boating is what the lake and river crowd like,” Fitzpatrick said. “It’s a youthful crowd like with many water sports.”

Among other holdings, Medifast makes weight and disease management products. EPS growth has sped up, going from 0% four quarters ago to 8%, 76% and 98% the past three stanzas.

That growth stems from a focus on its Optavia brand, which is a product line of weight-loss foods sold by health “coaches” to customers globally, Fitzpatrick says. It also reflects the closing of numerous sales channels, making the surviving channels healthier financially.

Kemet’s Cyclical Growth

Kemet (KEM) makes capacitors used by the aerospace, automotive, computer, defense and telecom industries. EPS grew at a triple-digit pace in seven of the past eight quarters. A couple of those were profits from year-ago losses, so they weren’t exactly profit increases.

“This electronics company is a cyclical grower,” Fitzpatrick said. “Today’s strong economic environment has a lot of components in short supply, which helps pricing and profits. Strong economic growth brings on new capacity (among customers), so demand exceeds supply for Kemet.”


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