Small but mighty Small but mighty\images\insights\article\ant-leaf-small.jpg January 6 2023 January 6 2023

Small but mighty

Opportunities can be found in small-cap markets.

Published January 6 2023
Podcast Transcript
Linda Duessel: Hello and welcome to the Here and Now Podcast from Federated Hermes. I'm Linda Duessel, Senior Equity Strategist. Today I'm joined by Federated Hermes Senior Portfolio Managers, Stephen DeNichilo, and John Ettinger. Steve and John are responsible for portfolio management and fundamental analysis in the global growth equity area and have more than 50 years of combined experience. Thank you both for joining the conversation today. I'd like to start and jump in with good riddance to 2022 in the stock market that we have endured and particularly the small-cap market. And now I know you each have at least 20 years in this business, so I think maybe I'll start here with you, Steve, and ask your thoughts as to how macro was involved this year and even versus history as versus fundamentals, in terms of what the market did in small-caps.
Stephen DeNichilo: Sure, thanks Linda. Thanks for having us here today. I'd say emphatically that the overall macro landscape has really taken hold of Wall Street this year, and it's always tough to compare it to history and because the present always feels worse than the past and maybe certainly the future, but right now the old adage of don't fight the Fed is front and center for everybody.
Stephen DeNichilo: And really starting in the first quarter of this year when it became clear that Powell was on a very hawkish path and everybody knew interest rates couldn't stay zero forever, but it became clear that he wasn't going to let this inflation run wild for much longer. And those words he used the year before, transitory... Geez, it seems long ago that he was calling inflation transitory. He definitively turned and it became all rates, all the time. And what has happened in that scenario is that as rates have gone up, people look at anything long duration as unfavorable.
Stephen DeNichilo: And I remember my old finance classes where you would do your dividend discount models and what's the fundamental value of a common stock? On paper, at least, it's the present tense of future cash flows divided by a risk-free rate. That risk-free rate, Linda, as we know, went from zero to a lot higher and that has hurt the perceived value of small-cap stocks in the short term.
Stephen DeNichilo: And it's easy to say that word, in the short term, but you really have to take a second and think about that because when you look at the terminal value of a small-cap growth stock's value three, five, seven years from now, it really doesn't change much, given short term variations in interest rates. And there's a number of reasons for that.
Stephen DeNichilo: Number one, these companies historically are less focused on debt. The way they're growing, their pathways are much different. It's private equity focused, it's capital markets focused. The amount of debt on the balance sheets of a lot of these small-cap growth companies that we're involved with is minimal to zero in most cases. And you really have to take a second and realize when you're a company that is changing the way somebody does something, and it could be how you drive, the medicines you take, how you communicate, how you deal with your own workforce, et cetera. These secular themes transcend short-term interest rate movements. And so it's really an opportunity, we think, where there's a disconnect between the fear and the worries on Wall Street and the value of that company.
Linda Duessel: You mentioned liquidity there and companies need for liquidity, and I'm not so interested in individual companies here, but rather liquidity itself becoming a particular concern out there in the marketplace. And if that is something that has hit small-cap stocks in particular, would you say Steve?
Stephen DeNichilo: I think there's that perceived worry when you're dealing with a smaller cap company that's in the early years of its investment, of its R&D, of its growth, of its economies of scale. People worry about that. We have not seen any evidence of large liquidity concerns in the high quality growth companies that we invest in. I don't think we have one example this year. Now you're seeing things start to unwind in something like the crypto market. These are far, far left of where we are usually investing in. And so this is not a scenario like 1999, the last time you saw a real bubble explode in growth companies, where you just had a bevy of unprofitable, low liquidity type companies and a lot going under. Will there be some bankruptcies? Will there be some headlines? Sure, but these are much more... That would be in much more cyclical debt late in companies. You're just not seeing it in the areas we traffic in.
Linda Duessel: Yeah, Steven, I think you made a very important point right there, which reminds us that when we get into small-cap investing, it's not a bad idea at all to have some professional management who really understands that there are many, many disparate companies out there. You mentioned the word high quality. This brings to mind, and I think it'll bring to mind a couple more times in our discussion today, the idea of babies being thrown out with the bathwater here, in terms of maybe companies that you invest in that are getting hit.
Linda Duessel: Now, I'd like to move over to John here and discuss what do you think about the issues of being a small company versus a large one?
John Ettinger: A lot of the IPOs we participated in last year were biotech, and a lot of these companies don't have any revenues. They're generally able to pass, to raise prices annually, but you're talking about some froth in the market.
John Ettinger: Last year was the most prolific IPO market in history. There were over 400 IPOs that came to the market and raised 150 billion dollars, and that's not even including the SPACs. You could double those numbers. The SPACs, there's over 500 SPACs, also raised another 150 billion. So there were a lot of investors and you certainly saw some other investors that were buying things they didn't really know. They weren't really understanding what they were buying, especially all the generalists that were pouring into the biotech IPOs. Everything was working. And then we had a shakeout towards the end of the year and the vast majority of the class of 2021 closed below their IPO price. So we see that as opportunity.
John Ettinger: In 2022, it will be one the lowest IPO year in history. And now we've really got a chance to, without being inundated with evaluating all the new IPOs, to see what we own and we're seeing some great opportunities. You're talking about babies being thrown out with the bath water. There was a point when biotechs had bottomed out earlier in the year, where we saw 30% of small and mid-cap biotech companies trading below cash. That's implying that their technology and IP is worth less than nothing. And we have scientists here studying these companies and we can assure you that a great number of these companies were worth more than zero. Their IP was worth more than zero.
Linda Duessel: 30%, now, that has to be a historically high number for all the years that you've been involved in growth investing, wouldn't you say, John?
John Ettinger: Yes. Yes. We've seen that number in the past. Maybe 10, 15%. But that's the highest number on record. Yes. And that was short-lived. Now I don't know if we'll test those lows again, but I can tell you at that time our two PhDs on staff evaluating the science of these companies, were pounding the table and saying, 'We see a lot of opportunity here.'
Linda Duessel: That's really, I think, a powerful comment about the valuations and the volatility that went in because as you said, leading into this year, the very unfriendly year for markets in general and higher beta if you will, small-caps definitely than historic. But in your experience, John, with the growth market, it's a very exciting market, and so I know it has swings like this. As much value as you saw with all that cash on biotech balance sheets, how about before we even got into this, coming into the year and did you say to each other on your team, 'My gosh, these are historically expensive.'
John Ettinger: Generally we ride our winners and we don't set price targets here. If you sell your winners, you end up with a portfolio full of losers.
Linda Duessel: I love it.
John Ettinger: We do trade around positions and we thought valuations were a bit extended and we took our cash position up. Our cash position right now is historically high, but with the volatility that we're seeing in the market, we want to be able to put that money to work in our top ideas if we happen to test new lows.
Linda Duessel: I'd like to talk now with you, Steve, a bit more about the market and what we saw this year. You made reference to cryptos, and I think you may have also brought up the SPACs. Now meme stocks, SPACs. What happened to the market this year? I thought the FAANGs were in trouble. What do we care about meme stocks in a quality small-cap portfolio?
Stephen DeNichilo: The answer is we don't, but it does give you signposts to what's going on in the market. And it was classic, toppy, bubbleish behavior that since the lows in Covid, you did see a gamification of the overall market. You had more retail Main Street participation in individual stocks than you've had since probably 1999. And it's all ending up in shambles, as it often does, when you see too high of speculation. And again, it became, 'Look, everything is going up. A rising tides lift all boats.' The savings rate was up, so investors were flush with cash, they were home with maybe less to do than historical times, and it was the perfect combination of a bubble.
Stephen DeNichilo: And it started with meme stocks and SPACs. It's not that some of these companies are bad companies, but when they just become vehicles for fun or social media posts, it really transcends what true investing is. And it's not something we're involved with, but it was a canary in the coal mine for what was to come, which was really a risk-off behavior and what we've seen. As we look through today though, there will be opportunities in companies that have just gone down with everything. And that's really what we do. We look over the long term. We're looking at a durable business model that can generate free cash flow. Most of these meme stocks, most of these SPACs, they're liquid roulette wheels.
Linda Duessel: It's very, very interesting. You don't own meme stocks and you don't own SPACs and you don't own FAANGs, maybe not, or not exclusively or too much, but rather are picking companies that maybe many people don't even know that they exist or what they do. And yet when this bubble commenced to burst, the tech part of the bubble anyway, commenced to burst. It was much like back in 1999 when of course many of the investors who were playing these very fun games weren't even around, maybe didn't even exist then. But when this type of behavior happens, and I know that you're both quite focused on the way you manage money in a volatile area of the marketplace. One of my resources is Leuthold. In their December report, this very fresh December report is saying that small-cap stocks today trade at a 29% discount to large company stocks.
Linda Duessel: And they were only this inexpensive versus large for the three months right after the pandemic hit. Before that, you need to go all the way back to the tech bubble crash, which a lot of us learned a lesson back then and our children won't listen to us today and maybe they have to learn the hard lesson today. And maybe that leaves you and your colleagues in a place with your dry powder that John has brought up in cash overweight to swoop in and take advantage.
Linda Duessel: Now, we've discussed about the market here. I'd like to move on and back with you, Steve, if I could, about how small-cap stocks behave during economic cycles. At this point in time, though there may be some debate, I think most of us would agree that we're not in an economic recession now, but that maybe we're going to have one next year. A vast majority of people think we will do. So how to-
Stephen DeNichilo: We better because we've already discounted it, Linda. That's a topic for another time.
Linda Duessel: You know what? And amen for that. Yes, a lot of the damage has already been done in the market, but how do growth stocks typically perform though, in a slowing economic environment? Are they timely, Steve?
Stephen DeNichilo: In periods of economic distress where you have a risk-off environment, initially, you see small-cap companies decline more. Why? They're a liquid, the companies are less known. You don't look to small-cap growth stocks in a flight to safety mode. In a fight versus flight environment, you fly, right? And this can be said simply by buying low never feels good. And that's what you're seeing right now, where you're seeing a under performance of a small-cap company. Investors are looking for right now, dividend yields, safety, larger cap companies, liquidity, et cetera. Even an environment where everything has gone down, that's just basic human psychology. And what you're seeing right now just from evaluation standpoint is very interesting.
Stephen DeNichilo: Number one, if you just look at the Russell 2000 Growth, which is a common index that just tracks small-cap growth companies. And if you look at, and this is where you need to look under the hood a little bit. If you look at companies in that index that have positive earnings because a large part of that index is unprofitable, and you have a large biotech contingent, which is unprofitable. You have to take that out. And we could talk about biotech separately, but that positive, profitable part of the Russell 2000 Growth is trading at 14 times earnings, this year's earnings. That's historically extremely cheap.
Stephen DeNichilo: One other point I want to mention on valuation, EV to sales, so that's enterprise value divided by your sales, which says what is the value of that dollar of sales for a company? Large cap growth index, which is all of the FAANGs you talk about as an EV to sales ratio of 3.5, the Russell 2000 Growth EV to sales is 1.7, more than 50% lower. So what is that telling you? That dollar of sales of a small-cap growth company, which theoretically has greater growth potential, greater opportunity, less known, is trading dramatically lower than a dollar sales of Google. Now, I'm not discounting what the dollar sales of a mega cap company is, but when you think about opportunity, when you think about potential, when you think about where the puck is going, not where the puck is, that's a small-cap growth company. And to see that divergence in what a dollar of sales is worth between a billion dollar company that has so much in front of it and a trillion dollar company is historically very, very wide.
Linda Duessel: Is it historically at a discount when normally it might be at a premium evaluation?
Stephen DeNichilo: Historically it's much closer. You're always going to see a premium in the sales ratio of a large cap company because there is stability for that. People will pay up for stability even in a risk on environment. But to see this level of disconnect between the two metrics says that investors are afraid, they're worried about everything, and they don't want to pay for it. And it's also called buying low.
Linda Duessel: I think we talked at the beginning about how the macro has hurt growth stocks because they're long duration stocks. But I love what you said, which is actually quite true and people forget. The stock market is a forecasting mechanism. It moves in advance of what the fundamental suggested it should do. So that the market has had a really bad year and as you suggest, growth stocks a particularly bad year, and what if next year the recession that 100% of us believe is going to happen, turns out to be actually quite a mild recession?
Stephen DeNichilo: In general, growth companies' metrics and their financial successes are much more resilient than a value stock. And that is nothing against value. And I think every portfolio should be diversified and that's more your area of expertise, Linda, than mine. But I understand the importance of a diversification. But if you think about what a growth company is versus what a value company is, a growth company can create their own momentum. If it was a sports player, it can create its own offense, no matter what is going on in the world.
Stephen DeNichilo: Now, to answer your question specifically. In recoveries, where you have a more risk-on environment, growth stocks have tended to outperform. If you think about what is going on right now that the Federal Reserve is trying to do, they're trying to slow everything down. In an environment where you have lower than expected GDP growth rate, investors should coalesce around companies that can grow regardless of GDP growth, regardless of currency, regardless of trade wars, regardless of real wars.
Stephen DeNichilo: A value company in a period of high GDP growth rate is what? A rising tide lifts all boats. You have high GDP growth rate, you typically have low interest rates, money is free, money's being printed, et cetera. Everybody wins, right?
Stephen DeNichilo: Pre covid, we were in a low interest rate, low growth world, which was unusual in and of itself, where growth outperformed dramatically from 2007 to 2019 or really till 2020. And I think the environment that Powell's trying to create a soft landing, we'll see what happens, but in that environment we want generally lower GDP growth rates, generally lower inflation, and that should be fertile ground for growth investing.
Linda Duessel: John, let's bring you back into the discussion now. You mentioned biotech stocks and how they were trading... A great portion of them in historic, historic portion, then we're trading below cash. My thoughts have been that with the many uncertainties that are out there now, from a macro standpoint, you'd like to get some fat pitches if possible, some serious pockets of value. And as you look at the landscape, of the investible landscape, John, you mentioned biotech stocks. What others do you find of interest?
John Ettinger: I would definitely call out biotech as an area. There are a lot of areas where we see value. You'll see a lot of franchise companies in our portfolios that have brands and these companies, they're high margin and they're high cash flow and they're growing on other people's capital. It's the franchisee that has to put up the money to open these stores, and there's a number of avenues of growth. You've got unit openings and then you have same store growth and they don't have all the infrastructure costs of running the stores. They're a franchise business and they're just taking a percentage off the top. Surprisingly, we're seeing opportunity in the REIT space, real estate investment trust, which historically has been a defensive area, but because REITs have high leverage and interest rates have gone up, they've sold off pretty much in line with the overall market.
John Ettinger: But we own a number of REITs that... You talked about the abilities to pass through cost of inflation. We own some gaming REITs that have CPI escalators built into their contracts, so they're able to pass those through. In the industrial REITs space, you've got long-term contracts of five years that are now coming up for renewal, and these contracts were priced 20, 30% below market. So when they come up for renewal, they're able to take up the prices of these leases, 20 to 30%. And then, of course hotel REITs, when a customer comes, they're changing their pricing every day and the price... You can go book your vacation and you'll see what your hotel price is. They're certainly able to pass through the cost of inflation. So REITs is actually an unlikely area for growth investors to find value, but we are finding value there.
Linda Duessel: That's really intriguing to me because when we think of growth investing, we do think of tech and biotech and we think of REITs just as you said, as more of a defensive area. Do you find opportunities in all the sectors of the marketplace, John?
John Ettinger: Well, we're seeing a lot of opportunity right now, and I've mentioned a few sectors. And then another area, where we've historically been highly underweight, we don't have a big bet there, but we've seen some opportunity, is even in the energy area, and that's an area that Steve DeNichilo would be able to talk a little bit more about. But listen, when you've got your stocks down 30%, you're going to see areas in a lot of different places. I tell our investors our stocks aren't on sale right now. We liked the majority of these companies at the beginning of the year when they were 30% higher and now they're lower, and this is the time to start investing. Buy low, sell high. It's the first thing everybody learns and it's the first thing forgotten.
Linda Duessel: Yes, it's true, isn't it, Steve, that we like to buy things on sale, but when stocks are off, we think, 'Oh my gosh, there's something wrong. I must stay away from it.' As you said, human nature. Now, John alluded to some things and throughout his discussion about how your team looks at companies, and what I always find infectious when I hear from you two, is the look in into the future and new discoveries, new technologies that can change the world, that can change... That we're not even aware of. The next Microsofts, if you will. Can you share, Steve, one of your favorite stories for an example of a company that you put into a portfolio and that's really cool, that you think is really... And that I find so infectious when you talk,
Stephen DeNichilo: Linda, you used the word, and I think the key word to focus on is the idea of change. The idea that the world is not a static place that tomorrow looks nothing like today, and it's our job and our pleasure to get a front row seat into those type of companies and thinking about how the world will look differently.
Stephen DeNichilo: If you think about something as mundane as Gmail. Gmail does not sound like some new invention, right, Linda? I mean, it's 15 years old. Think about that. YouTube is 16 years old. But think about what has changed over the last 15, 16 years. And so it's our thought of what's the world going to look like 15 years from now? And I firmly believe one theme is the electrification of everything. Elon Musk made electric vehicles cool. Electric vehicle technology has been around a long time, but it takes something to get over that tipping point. When you have a bombastic, omnipotent person preaching something, it starts to change perception. We've gone past the tipping point. And so the reality is my children's children, 1000 % will be driving electric vehicles, will have electric everything. Could be HVAC, certainly lawnmowers, you see that today. Just anything that you can think that runs on an internal combustion engine. The internal combustion engine was founded when? In the 1920s. It's probably time for a change, I'd say, right?
Linda Duessel: Yes, so Steve, can you give us an example of something that maybe we haven't heard or read about?
Stephen DeNichilo: I think in general we're skeptical of just every new electric vehicle brand that is selling cars. Historically, again, over the last hundred years, selling cars isn't a great business. Selling consumer cars change... Consumers are fickle and in the end of the day, it's a brand name.
Stephen DeNichilo: What's more interesting is the nuts and bolts of how we get that electric to the home. And the fact is, if you look over the last 10 years, our electricity use as a country, I'm just talking the US right now, but it's very similar for the entire globe. Our electricity use is actually down. We have more efficient HVAC appliances, we have more efficient refrigerators and dishwashers, et cetera. And so we've become more efficient with our energy. Now we're about to plug everything into the wall. If we do that, our electricity use as a country is on target to double very quickly.
Stephen DeNichilo: In order to double that electric use in the US, we have to harden our electric grid more than we've ever had before. We're at the dawn of what should be a 20 year cycle in investing in our electric grid to handle this electrification of the world. There are companies, there are construction companies, engineering companies, equipment companies that play into this theme of hardening our electric grid. Now, this has been a theme for a long time. Our grid has been under invested in forever, but now, that was in an environment of declining use. Now we're going to double use and the capital expenditures that should go into that market are going to be very large, and there's a lot of ways to play that theme.
Linda Duessel: That's really major. It's transformational and John, as Steve describes it, crosses over so many parts of our economy. But can you tell the group the more niche individual, but really cool story about the technology that helps police departments out there and to catch the bad guys?
John Ettinger: One of the names in our portfolio, they have a gunshot detection technology. They put up sensors about 20 sensors per square mile, and it triangulates wherever the gunshot is happening. 80 to 90% of the gunshots that go off in this country, there's no 911 call. So people wonder why the police never show up in their neighborhoods when there's guns blasting. The majority of the time there's no 911 call. And when there is, the police officer goes there and they knock on the door and somebody says, 'Yeah, I heard a gunshot.' They have no idea where it is or what it was.
John Ettinger: This will tell the police. It puts a dot on the map. It tells them exactly where the gunshot was, how many gunshots were there, was it an automatic weapon? Were there multiple weapons? It tells that, so the police know what they're walking into. And it builds trust with the community, that the community now knows that the police officer's going to come and respond and hopefully it's a deterrent for the bad guys. And then also in the worst case, sometimes they get there and somebody's been shot and is injured and they can assist that individual a lot quicker.
Linda Duessel: Whenever I hear bad things happen, I think I know that there's some really smart people on the good side of things. And this is a really fine example of it, and you brought up a point that I really want to emphasize to the group, which is you got many of your ideas from the IPO market. Can you explain how over the years your team has been able to have access to managements, actually some unique access to managements and to IPOs to populate the portfolios that you and Steve manage?
John Ettinger: We have a reputation here of being IPO investors and we have great access and we have the relationship with the investment banks and we generally get to meet the managements of every company that comes public. So we have great access to management and increasingly, we're doing what's called Testing the Waters Meetings, which occur 6 to 12 months before a company comes public. They want to get on the road, they want to start meeting with investors. They want to know, they want to be prepared, they want to know what type of questions they're going to get. And from our standpoint, we're getting an early look at the company. We get to do our research early. We're getting a head start, and when that company comes public, we're in a better position to know if we want to invest in it. And if we do, we're in a position to get a better allocation.
Linda Duessel: That is truly unique access. And Steve, piggybacking off of that, I've been told that if I should ever come to your offices in New York, it might very well be a ghost town because everybody is out there and meeting with managements. What are some of the high level thoughts from management teams right now that you've been speaking with, Steve?
Stephen DeNichilo: I appreciate the question. I think more than ever before, at least in my career, I've had management teams say, 'So what do you think, Steve? What's going out there?' And I think that just shows to your first question of this entire podcast, which talked about how it's just been a macro centric mania going on right now. And at the margin, it does affect CFO's and CEO's confidence, which affects capital expenditures, affects hiring, affects expense control, which is exactly what the Fed is trying to create. So let it be known that the Fed... It's like, careful what you wish for, you just might get it. The Fed is going to get some type of slowdown. You can't have this on front pages all the time. But what I do see is that companies that we're primarily invested in, do have a solution to a problem, do have...
Stephen DeNichilo: Our market share gainers are growing faster than the economy and their competition. So I think what I'm seeing is they're being cautious because they're told they have to be, because the Federal Reserve is telling them to be cautious. But their actual business trends, when you think about their three to five year horizons, and a lot of these companies right now are doing Investor Days where they typically give a three year look. Those three year looks, aspirational goals, whatever it may be, are very positive.
Stephen DeNichilo: If you're a cyclical steel manufacturer tied to China's GDP, you don't know what the heck's going on right now, but if you are a innovative med device company that is solving for sleep apnea, a new product that no one has ever seen before, you're going to be okay. And if you're a company that is not reliant on the debt markets, again, you're going to be okay. And so they see the volatility and so they're cautious, but really not much changes over a three plus year horizon.
Linda Duessel: And as we see ourselves quickly, unfortunately running out of time, I could talk to you two gentlemen for hours, but John, I think you did make mention about the volatility in the markets and a hot IPO market and then an ice cold IPO market. And now that we have cash around because there's some serious pockets of value, you've got lots of possible opportunities. But what is the current state of the IPO market? When do you think that might get back on the saddle again?
John Ettinger: As I said, 2021 was a record hot IPO market with a number of deals and the amount of money raised, and 2022, we're on track to be a record low market. Generally, we really don't care if it's a hot or cold market. Hot markets, yeah, there's a lot more to do, a lot more companies to evaluate. But if you've got a deal that's 20 to 30 times oversubscribed, we're going to get a smaller allocation on the IPO and then that stock's going to trade up 30, 40%. And then we have a decision to make if we're going to be adding to that company right out of the gate when it's trading so much.
John Ettinger: So actually we've made more money during cold IPO markets. With a cold deal, we can really get a big piece of the company if we want, and we're involved in the pricing of that deal, and we don't have to worry about the price gapping up on the first trade, and we can be an active aftermarket buyer there.
Linda Duessel: That's an excellent point. Thank you, John. Well, we know crypto's having a winter that some wonder they'll be able to survive, but meanwhile, it sounds like you'd rather enjoy the winter. Well, thank you so very much, Steve and John, for sharing your perspectives and outlook for small-caps in 2023. And of course, thank you to our listeners. We look forward to you joining us again on the Federated Hermes Here and Now podcast. If you enjoyed this podcast, we invite you to subscribe to the Federated Hermes channel to get every Here and Now episode, plus our other series, Amplified and Fundamentals for a global perspective on the issues, challenges, and trends shaping the investment landscape. I also encourage you to subscribe to our Insights email updates for the latest commentary from the many great minds at Federated Hermes and follow us on LinkedIn and Twitter
Disclosures: Views are as of December 12th, 2022, and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Past performance is no guarantee of future results. Small-cap companies may have less liquid stock, a more volatile share price, unproven track records, a limited product or service base, and limited access to capital. The above factors could make small-cap companies more likely to fail than larger companies and increase the volatility of the funds portfolio, performance and share price. Suitable securities of small-cap companies also can have limited availability and cause capacity constraints on investment strategies for funds that invest in them. Investing in IPOs involve special risks such as limited liquidity and increased volatility. Beta is a measure of the volatility of a security in comparison to the market as a whole. Diversification does not assure a profit or protect against a loss.
Disclosures: Russell 2000 Growth Index measures the performance of the small-cap growth segment of the US equity universe. It includes those Russell 2000 index companies with higher price to value ratios and higher forecasted growth values. Due to their relatively high valuations, growth stocks are typically more volatile than value stocks. A special purpose acquisition company or SPAC is a publicly traded company created for the purpose of acquiring or merging with an existing company. A meme stock is a stock that gains popularity among retail investors through social media. FAANG is an acronym that refers to the stocks of five prominent American technology companies. Terminal value, TV, is the value of an asset business or project beyond the forecasted period when future cash flows can be estimated. Federated Global Investment Management Corp.
Tags Equity . Markets/Economy . Active Management .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

Small-cap companies may have less liquid stock, a more volatile share price, unproven track records, a limited product or service base and limited access to capital. The above factors could make small-cap companies more likely to fail than larger companies and increase the volatility of a fund’s portfolio, performance and share price. Suitable securities of small-cap companies also can have limited availability and cause capacity constraints on investment strategies for funds that invest in them.

Investing in IPOs involves special risks such as limited liquidity and increased volatility.

Beta analyzes the market risk of a fund by showing how responsive the fund is to the market. The beta of the market is 1.00. Accordingly, a fund with a 1.10 beta is expected to perform 10% better than the market in up markets and 10% worse in down markets. Usually the higher betas represent riskier investments.

Diversification does not assure a profit nor protect against loss.

Russell 2000® Growth Index: Measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. Investments cannot be made directly in an index.

Due to their relatively high valuations, growth stocks are typically more volatile than value stocks.

A special purpose acquisition company, or SPAC, is a publicly traded company created for the purpose of acquiring or merging with an existing company.

A meme stock is a stock that gains popularity among retail investors through social media.

FAANGs is the acronym that refers to the stocks of five prominent American technology companies.

Terminal value (TV) is the value of an asset, business, or project beyond the forecasted period when future cash flows can be estimated.

Federated Global Investment Management Corp.