C (2:21)

Yes.

A (2:22)

And that's what prompted this conversation because you have a thesis on small cap stocks. We find the news is dominated by big tech and the big AI trade and large companies. So I'd love to get your perspective on how you define small cap stocks and why they're interesting to you.

C (2:41)

So I think small cap stocks are interesting because they, they're what power America. Like the, that you're going to have a much higher concentration of revenue based in the United States of America. And as we're going through for whatever reason this reshoring philosophy in America. And I think that small cap stocks and what I'm seeing is that small cap stocks are going to benefit. I also think this is a really interesting time. With the Fed cutting rates at all time highs. That is traditionally a very good time to be investing in small cap stocks because the local economy is really going to take off and then AI I think we're in a world a lot of your listeners might not even remember this world. But there was a movie called Revenge of the Nerds when I was in the 80s and at that time people who were very smart and good with technology were like looked down on like, which is inconceivable, mind blown. And so the past 40 years have been very good for software companies and technology companies. But what we're starting to see now with AI so we're not chasing a hot AI trade. But with AI the physical world matters more than ever, whether it's electricity or filters. So it's a great time to invest in small cap stocks. Also it's a good time to put small cap stocks on your radar because let's say in the 90s everyone had some sort of allocation to small cap stocks. But certainly since the great financial crisis, the outperformance of large cap stocks has been so marked that people might have forgotten that they even could use an allocation to small cap stocks. But if, and I'm not saying we are, I own mega cap tech in different strategies, but it might be sort of the peak of the mega cap tech trend. And if so you always have to be wondering where am I going to make money next? And I think small cap stocks are a great way to do that for the next while.

A (5:04)

So let's nerd out on the jargon for just a second and then we can get us in some stories. I know, I love the Revenge of the Nerds spoke to me because I'm such a nerd myself. Manny, define a small cap stock in terms of the market cap for It, Sure. What are the core ways in which you can look at a stock? You can smell it, it walks like a duck, it talks like a duck. You're like, this is one of them.

C (5:24)

So I look, for me, it's 10 billion and below.

A (5:29)

Oh, wow. That's actually quite big by some measures.

C (5:31)

Actually that's quite big by some measures. But we almost live in a world where you're like trillions or not. And I really like to hold on to the winners, as I mentioned. And I want everyone to be involved with winning stocks. So I don't see any reason to limit yourself to like 6 billion or something like that. It functionally makes no difference.

A (5:56)

So 10 billion or below.

C (5:57)

Yeah.

A (5:58)

And then what about their profiles in terms of their profitability? Let's, let's go there.

C (6:03)

Right. So one of the reasons that I invested in Build a Bear is I really like to buy companies that are throwing off a lot of free cash flow and have good returns on invested capital because that way. So small cap stocks can be volatile. Like if they're sometimes, if there's two people selling, that's like a half person too much. But if the company produces a lot of free cash flow, they can benefit from it and shrink their cap. And you as a shareholder will ultimately benefit and you might get less volatility in the meantime. Like in a. If you go back to April when we had Independence Day or whatever.

A (6:44)

Yeah, Liberation Day.

C (6:45)

Liberation Day. So I think that's a great, A great way to get through the volatile times is to buy companies with a reasonable valuation that are throwing off free cash flow. And again, with this focus on mega cap tech, there's just very few analysts left who even follow these things. So it's a great opportunity to do your own work. I also like to buy companies that are paying a dividend.

A (7:13)

Okay.

C (7:14)

It shows that an alignment between management and shareholders that sometimes you don't see in small caps, where it helps reduce the corporate culture is more aligned with what I'm trying to achieve. I want us all to make money. Like they can make more money because they're the CEOs. But I want to make money too. I don't want it to be a situation where they're manipulating earnings and having their options hit. And then like I'm stuck holding a pile of not a great company. So I like to buy dividend paying, small cap stocks as well.

A (7:50)

So then what I'm hearing, as you added that point, Manny, is these are businesses then that are characterized by a certain amount of stability, consistency in that cash flow they may or may not have to reinvest in themselves through capex but there's enough to go around is what I'm hearing. So you've identified one name you and I talked about which is in the retail space which you've held on to. It's had a good run. So you know, query whether it's, it's, you know, you hold on to a winner but it query whether it's had its, its best run. What are other sectors that fall into this kind of category?

C (8:24)

Well, I think it's really important to be invested in all the sectors and sometimes that's tricky. So in you're not going to find dividend paying health care stocks all that often but you know, if you can find a profitable one. So basically I'm avoiding biotech because that, that requires a lot of expertise. But health insurers have health insure definitely you can have companies that provide services like home health care or physical therapy. You know there definitely opportunities to invest in these types of companies in healthcare. I like industrials a lot. You can find companies that are, you know, very much in the physical world and benefiting from AI as a way to cut costs. Lear, which makes auto seats and electrical harnesses. So it's a supplier to the auto industry which is a company I own. I'm not recommending it because I don't know anyone's situation here. But it's a great example of a company that was able to use AI to very quickly get organized around tariffs and they were able to figure out what the tariff regime was for each part and change all things. And they did it with AI when in the past they would have needed consultants. So they were done in 10 days and they said that's how long it would have taken the consultants to get their pitch deck together.

A (9:56)

Yes, that's fascinating. And in terms of were they able to put numbers around the savings or the lack of incremental costs that they had to incur as a result of using AI tools?

C (10:08)

Well they're raising margins and they do continue to beat and raise and I assume a lot of that is around AI.

A (10:17)

So that's one area of industrials, auto parts, there are others. Talk to me about distribution. Companies historically have fallen into this bucket. Where else are you looking?

C (10:27)

Sure. So in technology you can as an example Synix is a company I own which is literally just a IT distributor and you know, they'll own the hardware and then distribute it out and it's a historically very low margin business with Very high free cash flow because they're not building factories to do this. E is another distributor that is doing a very, you know, as there needs to be an AI refresh. It's been about five years since everyone bought all their PCs for Covid.

A (11:06)

Yeah.

C (11:06)

So Brunswick is in boats. Yeah. So boat inventory is down to the lowest levels since the great financial crisis and it's still throwing off a lot of free cash flow.

A (11:23)

More of my conversation with Manny Weintraub in just a moment with a big insight coming up at the end. So stick with us.

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A (12:30)

To my conversation with Manny Weintraub, a principal and portfolio manager at Candle and Spears.

C (12:35)

You know, I find a lot of my ideas off the 52 week high list. So without jargon, I find a lot of my ideas from stocks that are going up. Talk about that when you're first starting to invest in stocks and you want to buy something cheap, maybe your natural inclination is to like look at things that are really beaten down.

A (12:55)

Yeah.

C (12:55)

And like Chinese technology was really beaten down. And so that could have been a great investment. But there's also an easier way I find to make money, which is to find companies maybe they were beaten down but are just starting to work and hitting still have a reasonable valuation but.

A (13:16)

Are going up because your assumption there is. They're going up for a reason because there is actually underlying improvement.

C (13:21)

It's worth a look like that. And especially when no one without we'll get back to later. But no one else is doing this. No analysts cover this. There's no money to be made.

A (13:31)

Yes, let's go that, let's go there because I, I'm having deja vu, Manny, as I hear you describe this population of interesting stocks. I grew up in the world of private equity and the way you've talked about screening for stocks to buy, looking at the 52 week high in the cadence, I. My job when I was starting out in the industry was to look for companies, guess what, 10 billion or under, roughly, which were of a size at a private equity fund that I was working at the time, could afford to take private. Right. It meant that it could write an equity check and then take out some debt to buy a company of that size. And the reason that I would go hunting for opportunities in the kinds of groups you've just laid out, including distribution and industrials. So I'm nerding out on steroids here. Like I love this whole thing is because the fact it was undercovered by analysts that there weren't perhaps, you know, 20 Wall street analysts at big banks spending time with management writing in depth research reports meant there was an opportunity for someone like me as an investor working at a big firm with other resources to do some work independently and figure out if this was an opportunity to go take a company private. Yeah, but I was working at a big firm. I did have access to industry research reports or consult or to former executives from that space. How can the retail investor do that kind of work instead? Or maybe they can't.

C (14:56)

I don't know if they can. I mean, if it's a passion, I think you can. I have to say, AI makes it a lot easier. So regulations that require companies to distribute information widely do make that a lot easier than it was. I started out at Neuberger Berman before information was required to be spread widely. We'd have management coming through all the time. And the most. The question everyone would ask, you know, last question was like, so how's the quarter looking?

A (15:30)

Right. Which is definitely not a question that can be asked in this environment. Yeah, yeah, for sure.

C (15:35)

Answered times have changed.

A (15:36)

Yeah.

C (15:37)

I think there, if you look, go to, you can look at government filings like 10Ks and 10K cues. And I love the management's discussion and analysis segment of these filings. Like you take that information, you combine that with AI and, and you care. And you're the only one who cares. Like, I'm pretty sure you can, you can make some money.

A (16:02)

It's so interesting you say that because we often talk on this show about. I am such a nerd. I love to go to the underlying Filings myself. We don't rely here on press coverage. We don't even rely here on, on analyst reports. We will literally go to the investor relations websites of these companies. You will find a link to their annual reports and the quarterly filings, including through to the SEC website. Edgar. Right, right. Which is is the ugliest website you've ever seen. It's user interface, it can be very bland. But you go in there. Exactly. And you go in there and it's just tons and tons and tons and tons of information. So it's exciting to hear you talk about go hunting in these places. But there are other kinds of resources too. There was one hedge fund manager who's a friend of mine who would invest in retail stocks and he himself and his analyst would walk around stores all the time and say to the store associates, so how much stuff have you still got sitting in the storage room at the back as a way to figure out what potential markdowns would be coming? How much on the ground work? Are you seeing boots on the ground from your end?

C (17:05)

Well, retail is detail. I started as a retail analyst and I met my wife on a Goldman Sachs retail.

A (17:12)

Did you really.

C (17:14)

Date was at the mall White Plains. So I, you know what, I have made more money not visiting companies than I have visiting companies I've gone to like pig harvesting plants. I don't know, you call it chicken harvesting, like high fructose corn syrup. And in the end if the numbers are good and the stock is working, I would rather just buy it and then do more work. Like I went with my daughter to on spring break to Florida. You know, I drag her into Urban Outfitters and then a Cheesecake Factory and all this stuff. And I think it's great to do, but I don't think it's the way things are structured right now. It's really in favor of smaller investors who do their work. I don't feel like you need to do extra work beyond that.

A (18:08)

Interesting. When we take a look at where retail investors have been trying to get some exposure to small caps. Lots of people talk about the Russell 2000. Could you break down just for our listeners what that is and talk to us about the run it's had recently. Manny.

C (18:24)

So the Russell 2000 is the, you know, the official index of small cap stocks. It's the most typical benchmark. I don't think it's 2000 stocks anymore, but it's maybe 1600, 1700. It is on a cap weighted basis, 30% of it is not profitable. So you can Mix in speculative stocks in there. Last time we checked, 10% of the companies were biotech, which I would say is unprofitable on purpose. They're still trying to create value. The run it had like up through like June, maybe even July, it was like flat for the year. But it has been on a tear lately. It's not like too late. It's not like Silver's been on a bigger tear, for example. But last year small cap stocks almost beat the s and P500.

A (19:20)

And why is it now going on a tear? Is this, is this a combination of institutions and retail investors doing what you said, which is we're so overexposed now in mega caps because they've gone up so far, we need to find somewhere else to park our cash? Or is there a sense of maybe we should be looking at some of these, this 30% that's not free cash flowing and there's more speculative biotech.

C (19:42)

I. Well, I think part of it is the Fed cutting rates while the market is at highs. Like that definitely is. Encourages speculation, right? No question. And I don't want to say it ended terribly in 2021, but like there was a long period of consolidation. Happily for anyone who's forgotten, that was during COVID and people were gambling and interest rates were very low.

A (20:11)

Oh, it's so recent. We all, yeah, we all sort of lived through it. The shaking of head in the studio, the sigh.

C (20:19)

I think also part of it is we are starting to see companies like Lear benefiting from AI and margins improving. I saw a great chart from JP Morgan. The data center build out as a percent of GDP is three times what the Manhattan Project building the nuclear bomb. Even in 2018, the idea of investing in gold was like, eh, do I need an allocation? Whatever. And now I think it's pretty clear that certainly international investors feel they need an allocation to precious metals. And the analogy is we're not at the point now where international institutions feel like, okay, I need the opportunity to make money in US small cap. So it's very early in that cycle.

A (21:12)

It's. You just said something interesting though, which is there's your approach to investing in small caps, which is very deliberate. That's very intentional thesis here. And then you take a look at something like the Russell 2000 and just the cautionary tale that I'm hearing as I listen to you, Manny, is for many folks don't have the time or don't make the time to do the kind of detailed homework into specific stocks and so they default to ETFs right, right. They default to baskets of stocks. Yeah. And so there are out there small cap ETFs and just baskets. And what I'm hearing you say, and you've said it a couple of different ways, is they're not all created equal.

C (21:50)

Right.

A (21:50)

And so really trying to figure out what kind of small cap exposure you, you want.

C (21:55)

Yes.

A (21:55)

Actually extends beyond necessarily just buying an etf. And because it's got a small cap.

C (21:59)

I think it's uniquely not suited for an etf. And I ETF things like all over the place for my clients. I've never owned this company. Okay. But Revolution, I don't know. Bio Science is rumored to be taken over by Merck. I think the week before is rumored to be taken over by another company.

A (22:21)

AbbVie, I think was going after it.

C (22:23)

But the point is it was in the small cap index for years. I think it moved out in June and now it's rocketed higher in a way. What makes the S&P 500 such a great index is they don't sell the winners. What if they had had to like sell Nvidia because it was like too large a cap when. So that's hard with ETFs because they are going to have to a. They're going to have to buy the losers. Like something graduates in a bad way from the mid cap index to the small.

A (22:51)

Yeah. It gets dropped out. Yeah.

C (22:53)

And then you also have things where like they do a great job and all of a sudden you know, they're in a mid cap index and you don't own it.

A (23:01)

Fascinating. This is the last question for you, Manny, which is a little bit to this question of asset allocation. You brought up gold. What are your thoughts on Bitcoin?

C (23:09)

People I respect are very interested in all sorts of cryptocurrencies. I don't get it yet. And so I wish everyone the best of luck with that one.

A (23:21)

I love it. There are such divergent opinions on this one and opinions that have actually changed over time. So we'll have to have you back. Manny, ask you six months from now whether that's still your perspective as Manny Weintraub, principal and portfolio manager at Cannell and Spears. Thank you for joining.

C (23:37)

You're welcome. Thank you.

A (23:39)

Many thanks to Manny Weintraub for joining us. That is it for today's Brew Markets Daily.

B (23:43)

Brew Markets Daily is hosted by Anne Barry and produced by John Curto, Tarkab Delatif and Emily Milian. Our technical director is Lonnie Fiskis. Jim Orzo is our audio engineer. Guest booking by A.B. silver and the president of Morning Brew Inc. Is Devin Emery.

A (23:55)

Wake up on Monday with the Morning Brew newsletter and tune in to Neil and Toby on Morning Brew daily. Have a great weekend to see you back here on Monday, same time, same place.