Trends Watch: Investing in Small and Mid-Cap Companies

EisnerAmper’ s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Jennifer Ralph Oppold, Founder and Portfolio Manager, Alpine Peaks Capital.

What is your outlook for long/short investing in small and mid-cap companies?

Increasingly we see what appears to be rising structural inefficiencies in small and mid-cap investing which provides both long and short opportunities.  In general, there seem to be fewer sell-side and buy-side analysts focused on smaller companies.  We think this contributes to the volatility in the space, as fewer people know the companies well enough to step in with conviction in more volatile markets.  That opens up an opportunity for firms who follow these companies for many years and understand how they have historically performed across different market environments and build greater conviction on being either long or short.

Where do you see the greatest opportunities and why?

Small and mid-cap companies tend to be more volatile, which provides promising opportunities on both the long and short side.  On the long side, there are some great companies with strong balance sheets that have largely non-cyclical businesses sell off, and that is providing an opportunity to add at extremely attractive valuations.  Our biggest concern on the long side is missing a proverbial “baby thrown out with the bathwater,” as there are some great companies that can get caught up in broader market selloffs, but the opportunity tends to be fleeting.

On the short side, we have seen opportunities in companies that were COVID-19 beneficiaries and now face tough comparisons as consumers shift their spending, companies that serve lower income consumers who are particularly pressured by rising inflation and the end of stimulus spending, and heavily levered companies with near-term maturities.  This is a tough environment for companies that need to refinance, as many of them are facing both rising rates and declining EBITDA, at least in the near term.  Our macro-economic outlook has shifted steadily downward over the course of the year as interest rates have risen.

What are the greatest challenges you face and why?

The most challenging markets tend to be the early stages of coming out of a cyclical downturn.  Over a business cycle we have found they deliver strong returns that compound investors’ capital, but in a cyclical upswing they tend to underperform on a relative basis.

What keeps you up at night?

For every holding we think about “silver bullet” risks of headlines that we would hate to see.  They differ by company, but it is typically anything that would significantly impair a company’s reputation with customers.  Apart from that, I worry about missing opportunities to buy great companies.  There are moments of very high correlation when the market sells off more or less in lockstep, dragging everyone down with it.  These value moments tend to be fleeting for companies with durable growth, strong profitability and fortress balance sheets however, and so you need to be alert to valuations and be willing to step in at moments when there is typically significant volatility. 

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.