Animal Spirits Podcast - Talk Your Book: Finding Small Cap Diamonds in the Rough

Episode Date: August 26, 2024

On today's show, we spoke with Brandon Nelson, Senior Portfolio Manager for Calamos to discuss Calamos' favorite small cap sectors, why small caps have flown under the radar, understanding the relationship between momentum and fundamentals, profitability of small cap stocks, and much more! Find complete show notes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Check out the latest in financial blogger fashion at The Compound shop: https://www.idontshop.com Past performance is not indicative of future results. The material discussed has been provided for informational purposes only and is not intended as legal or investment advice or a recommendation of any particular security or strategy. The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed.   Investing involves the risk of loss. This podcast is for informational purposes only and should not be or regarded as personalized investment advice or relied upon for investment decisions. Michael Batnick and Ben Carlson are employees of Ritholtz Wealth Management and may maintain positions in the securities discussed in this video. All opinions expressed by them are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. The Compound Media, Incorporated, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. For additional advertisement disclaimers see here https://ritholtzwealth.com/advertising-disclaimers. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information. Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits Talk Your Book is brought to you by Calamos. Go to Calamos.com to learn more about the Calmos, Timpani Small Cap Growth Fund, which you're talking about today. Also check out the new structured products that Calmos is releasing. They have a new S&P 500 structured protection ETF, CPST. 100% downside. They also give the ranges for the potential upside on there. We'll have links to that in the show notes. Calamos.com to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Riddholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholt's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. Michael, I'm a big cycles guy.

I think Marks said something, Howard Mark said something along the lines of the only thing you can count on in the financial markets is cycles. And I believe this to be true. But I think it's harder for a lot of people to believe it because the S&P 500 and U.S. stocks have done so much better than everything else for the past 15 years. What are you going to throw in the towel? It would have to be a lot longer, I think. Don't you?

Right. It's 2046, Ben says, all right, I don't believe in cycles anymore. It's only U.S. large-capped growth. I guess the magnitude of this outperformance is not like the biggest outperformance by amount. It's just the time frame. I think that's what has gotten so many people to. And if you've been investing in the markets for one to two decades, you look back on it and you say, yeah, why would I ever invest in anything else? And I understand why people think that.

But I choose to believe that diversification is still a thing. That's what I'll go to my grave with on my headstone. It'll say like diversification never dies. That's kind of my feeling on these things. Yeah, it's a good place to be. I was looking at, on the show we said that, like, or you said that small cups have underperformed for the last seven years. So I was looking while you said that.

And they have underperformed for a long time. However, from 2013 through the end. ish of 2018. So almost a six-year period, the S&P and the rest of 2000 were neck and neck. And then during the sell-off of 2018, a gap opened up and it's just beginning wider and wider and wider. So really, for the past, call it five years, it's been pretty painful for small-cap investors relative to large caps. The thing is, it's not like small caps have done horrid. They just, they've under, so if you look at the last 10 and 15 years, so this is over the last 15 years. So I'm using a little longer experience. Like I said, 15 years is about it. The Russell

2000 is up more than 11% per year. It's just not up to the 14% per year that the S&P is. So it's not like small cap stocks have just been like languishing and doing nothing. Right. They've given pretty solid return just not as good as the S&P 500. So that that's something to also remember. And for the first, it's the funny thing is as cyclical as these things are. The narratives are cyclical too because in the early 2000s, it was small caps did so much better and large caps coming out of the dot-com crisis, that the small caps were the battle of the ball, and everyone was wanting to allocate more to that asset class. So it's cyclical. I can't predict the timing on these things, but I'm still sticking with that theory. So on today's show,

we talked to Brandon Nelson. Brandon is a senior portfolio manager, Calamos investments, formerly of Tempani, investment research. Calmos bought them and their small cap team, brought them in. Fellow Midwesterner based in Milwaukee. Calamos is based in the, out circuits of Chicago. Sorry, Michael. These are Flaver State people. But we had a great talk with Brandon today about the small cap universe, how they pick small cap stocks. So here's our talk with Brandon Nelson from Caldol's Investments. All right, we are joined today by Brandon Nelson, Caldol's Investments. Brandon, welcome to the show. Thank you. Thanks for having me. So you're in the small cap space, and we've seen a lot of movement there. It feels like the last,

I don't know how to define some of these cycles between asset classes. let's call it the last, I don't know, seven years or so, large cap stocks and especially large cap growth has kind of dominated everything. And people have been waiting for the small cap arena to take its place because these things are cyclical. And in the past couple of months, looks like the Fed's going to cut rates. And small caps had this huge bounce. And everyone's like, all right, here we go. This is it. So I'm just curious, your thoughts on where we are in this cycle. and if the small cap opportunity really is as big as everyone says it in terms of the valuation differences between large and small caps? Yeah, I think it is a great opportunity, and there have been headfakes before.

So I think it's reasonable to be, you know, a little guarded. And I think it's even been longer than seven years where large caps have been winning. And if you look, you know, at multiple decades, you do tend to see, you know, the small caps. will lead for a decade, give or take, and then the large caps will lead for a decade, give or take. But, you know, looking long term, you know, the last hundred years or so, small caps do have the upper hand if you've got sort of extremely long timeline and sort of perspective on things. So I think that's point number one. I guess I would keep in mind is they do tend to win, even though they haven't won in recent years.

It's been easy, I think, to forget that very long-term small-caps are great asset class and tend to perform extremely well. But I think, you know, zooming in more recently, I think the valuations are very extreme. As you pointed out, Large has been winning for a long time. That's caused valuations to become very stretched for small caps, you know, being there around the 15th percentile, give or take of where they typically are relative to large. but that in and of itself isn't a catalyst. You need some reason other than valuation to get people to actually move money, I think. And I think that brings us to where we stand in the Fed tightening cycle, soon to be a loosening cycle. And that could be the catalyst that actually causes people to do something about it and, you know, start that mean reversion to small cap valuations, getting back to maybe where they normally are or even at a premium to large caps.

We have a lot of advisors listening to this podcast. We were taught in the advisor community from the academics, the gene farmers of the world, that small cap value is the area to allocate money to. And actually small cap growth has had the best individual performances have come out of the small cap arena. But if you were to just index the small cap growth area, probably or perhaps not the best place to index. Would you agree with that and then say, well, yeah, that's why you need to be stock pickers and not index investors in the small cap growth area. Or would you go further and just reject the whole premise out of hand? You know, just like with small versus large, you see small value and small growth kind of change which ones have a leadership role. I think, yeah, long, you know, starting since like the late 70s when the Russell indexes were created, I think small value is outperformed modestly over small growth. But small growth has had, you know, huge surges. And I think it would be foolish to just dismiss small growth as an asset class. Both have their day in the sun, and I think it's appropriate to, you know, keep an eye on both.

But I think to your second point, stock picking is extremely important in small cap. It's probably more important than in large cap. Just the smaller you go in terms of the stocks you're trafficking in, they tend to exaggerate your decision making. The good decisions get rewarded disproportionately. The bad decisions get punished disproportionately. And I think that applies to small growth and small value. So stock picking is huge in the small cap world. There's a data point showing that the percentage of non-profitable companies with the Russell

2000 has grown over time. It was 20% a decade or two ago, whatever it was. And now it's closer to 40%. I would imagine that within your universe, the small growth universe, it's even more, there's even more, a higher percentage of companies that are losing money on the bottom line. Can you talk about that dynamic? Yeah, that's probably true. I haven't seen small growth versus small value broken out. You know, us being active managers and not hugging any particular index, the stocks we choose are substantially more profitable than the index components overall.

I just looked just this morning, actually, just in anticipation of your question, I wanted to get current data. And for our portfolios, looking out to 2025, profitability, you know, less than 10% of our stocks are unprofitable or scheduled to be unprofitable. So, you know, we're stock picking. We're not beholden just to whatever's in an index. I think there's some truth to what you're saying. Just the components tend to be less profitable. A lot of that's biotech.

And in and of itself, biotech, you know, isn't inherently bad. It's just, it sort of goes with the territory that they tend to be less profitable. There's more binary event risk. And there just so happens to be heavier exposure to that industry in the small growth index. So is it just a pretty simple, some sort of qualities crew in however you define that to get rid of those bad companies in the Russell 2000? because people talk about that a lot saying, geez, I'm not going to touch small caps because of this component. But isn't it fairly simple to weed out those really bad companies that probably aren't going to do much? Yeah, absolutely.

You could run screens to isolate just the profitable companies. But even there, what's profitable isn't necessarily a great investment. They could be barely profitable, not have any sort of growth prospects. I think there's a, again, as I pointed out, we're biased toward profitability, but not being profitable is not an automatic stock is horrible. You know, like if there's an exciting situation, you know, they've got some, you know, amazing medical cure or some other sort of, you know, exciting opportunity. be a GLP1 drug, for instance, that's not yet profitable, but it has the makings of being a huge company. You still want to pay attention to those. And so, you know, we do our best to navigate through the profitable and unprofitable and look for companies that and stocks that have,

you know, home run potential. Michael was shorting Amazon in 2014 because they weren't profitable. Yeah. Yeah. 2011. 2011. You're ahead of the game. And you got to remember, some of these unprofitable ones can turn profitable very quickly, too. So I'm saying that in our portfolios are, again, very much more profitably tilted than that. Brandon, we're going to get into your portfolio. But before we do that, I think it was David Einhorn, who was talking about that it's hard picking stocks that people don't care about that are undercover by analysts.

Because if there is value, but there's nobody there to ultimately realize the value, if there's no shareholders that catch onto the story because everybody's focused on mega cap growth, then these companies can remain disconnected from intrinsic value for an uncomfortably long period of time. Curious to hear your thoughts on that dynamic where if these businesses, because these are businesses, they're not just stocks, if these businesses are so undercover that nobody really pays attention, can the disconnect remain indefinitely? It definitely could. The stocks we traffic in are very excited.

exciting and are, you know, linked to companies that are growing very fast. And with that tends to come increased awareness and, you know, this tendency for liquidity to get better as they hit milestones that attracts more investor attention, more sell site analyst attention. We're looking for companies that have the potential to get re-rated higher, to get discovered. We want to go along for that ride where they're going to get re-rated. You know, maybe they started at a 12 PE ratio and through the course of time in discovery and well execution by management, they go, they become a 25, 35 times PE multiple.

That's the way we're looking for and looking for stocks that have the potential to get rerated. Yeah, you know what? That makes a lot of sense. I think I think Einhorn's lends is more through the value. So these companies that are training at four times earnings, yeah, they might be under value, but if nobody's going to re-rate them higher because they're not growing, they're not a story, then they could just languish forever. Yeah, I think you're right. I think he's got more

of a value tilt, and that's probably a greater risk. Yeah. I'm curious about, like, you mentioned the headwind of higher rates hurt smaller companies, which makes sense. The larger companies are able to borrow more, and the smaller companies are maybe rolling over their debt at higher rates. So it makes sense that they've had this headwind in the higher rate, higher inflationary environment. So that's a catalyst. One of the other things people have been mentioning in recent years, I've heard people, there's a research report, someone sent me a couple weeks ago saying one of the reasons that small cap investing is so much harder these days is because these companies are staying private longer and they're not becoming small caps.

They're jumping in the boat and going straight to mid or large cap when they go public. Do you find any truth of that in terms of your opportunity set? How are you thinking about how that has evolved? Has it impacted the stocks that you pick in any way or do you think there's still plenty of opportunity there? We see tons of opportunity. I've heard that argument many times. And I just don't see it moving the needle for us.

We've got more buy ideas than sell ideas. And there's just there's so many opportunities. And it's a dynamic world. And it hasn't been a constraint in us finding opportunities and finding stocks that chuck our boxes. Do you think, do you, so people, people casually say this. It sounds smart. It sounds right to me anyway.

that small cap stocks are more levered to the economy. They are more sensitive. Well, I guess being sensitive to interest rates and more levered to the economy are two different things. But how do you think about, I know you're more of a bottom-s-off stock picker, but how do you think about the macro impacting these companies? Yeah, I think for the average small-cap stock, they are more sensitive to cost the capital, just to cyclicality overall. I think, you know, just it's just, I think, factual. You've just got the Russell 2000 is going to have more of a cyclical tilt than the Russell 1,000, large cap index. And so, again, that's at the index level.

And Michael, like you pointed out, we're stock pickers. And we try to find secular growth where the stocks we're choosing aren't dependent on the overall economy. or that's more of a rounding error on how fast they're going to grow and what they're going to see. They've got some unique service or good that they're selling where they're insulated to a great degree by what the overall economy is doing, what the cost of capital trends are looking like in a whole bunch of other macro factors. We try to find stocks that maybe in a recession they're going to grow 22%, but in a GDP plus 2%, they're going to grow 25%. You know, like, it's just, it's around the edges. It's going to matter, but it's still going to be a great growth profile, even if they don't have macro tailwinds. So I'm curious about your process. We've talked about the small cap universe overall. Do you have a universe that you start with?

Do you start with the Russell 2000 and then winnow it down? Or how do you, or do you have a group of small cap growth companies that you're following? How do you, how do you winnow down that universe because there are so many more small cap companies to choose from? Yeah, we've been doing this, you know, over 28 years and have, you know, fine-tune the processes. You're right. There's a lot of stocks to choose from. We have certain criteria we're looking for. And when you kind of narrow it down to a sort of, you know, smaller list to work from, you know, you start with 2,000 plus stocks. You narrow it down to call it 150 to 200, you know, kind of layering on our initial criteria. And then you roll up your sleeves and dig into each of those and come up with a portfolio that's

you know, 80 to 120 stocks. And I'm making it sound so easy and you just kind of do this, you know, so quickly. But it's a, it's a long process. We take our time and really try to be thorough with the analysis. Are there any sectors within small cap that you're particularly excited about or does it really, is it really on a company by company basis? There are certain sectors that do have more of that secular tailwind. that I was describing before where you've got less sensitivity to the economy. You know, consumer discretionary, trying to find, you know, one-offs within that sector that at the company specific level, there's something unique going on.

Healthcare, there's a lot of secular growth. And then technology is another sector of a lot of secular growth. So those are the big three. We've been finding other opportunities around the edges in some other areas, too, industrials. There have been a few names there that have benefited from a lot of this AI spend that we've seen really ramp in the last year. So we're open-minded. We'll go anywhere. But the big three are consumer health care and technology and have other exposures. But that's where we probably spend the most amount of time. So I'm curious, so you screen out stocks, you screen into

stocks, whatever. And then you've got a list of 200. How do you go about learning these companies? Are you looking at, do you start with financials? Do you start reading some of the SEC filings? Do you read like Buffett does a lot of industry publications? How do you learn about these companies? And then what does the process look like to evaluate whether or not these are attractive opportunities? Yeah, we look at everything. And I feel like day to day, my team and I were drinking out of a fire hose, right?

It's just a lot of information from a lot of different directions. But, you know, big picture, we've got database screens that we're. We run to try to use technology to help us look in the right direction for stocks that have criteria that we're seeking. We're interacting with management teams all the time. So we go to conferences. We have a lot of traffic come through our office, management teams. And then we're interacting with the South Side community regularly.

You know, we have relationships with all the brokerage firms that you're familiar with and then some. And so that's sort of our new idea generation pipeline. It comes from one of those three areas, as well as just the maintenance that goes on once the name is in the portfolio. We're listening to the conference calls, having follow-up meetings with management teams and just in the trenches, just constantly doing research and balancing our time, finding new ideas for the portfolios, as well as just conducting the maintenance research necessary to gauge conviction. But the common denominator of what we're looking for, we call it fundamental momentum. that's companies that have a sustained growth profile where they can, they have an open-ended growth situation, they're going to be able to grow for the next several quarters and hopefully

years. And then second, have an underestimated growth profile. So we'd like to find companies that have a knack for beating expectations, management teams that not only know how to run their businesses efficiently, but know how to manage expectations. And so really it's those two things we look for. Again, fast growth and underestimated growth that we think is key to finding big winners for the portfolios. That fire hose of information you're talking about. If you were doing this, I don't know, 20 or 30 years ago when you first started, there probably wasn't as much information available. So is it still true that small caps are so under the radar because there's not a lot of analyst coverage? I guess I'm guessing is there more attention paid to these companies now,

even though they're not household names, like looking at your top 25 list of holdings as of June 30th, there's not many companies here that I know that, you know, on a name brand basis because they're still small caps. So that makes sense. But is there more attention being paid to these stocks now because of the free flow of information? Are these still kind of diamonds in the rough in a lot of ways? I think it's the latter. I think there's still diamonds in the rough. And I know, we're speaking generically, but I just, you know, especially in the last five, 10 years, I just feel like this asset class has been very neglected and there's been such a love affair with the mega caps that I feel like a lot of these have just gone by the wayside and that's where I think

there's opportunity and it's I think there's always been opportunity and it just seems like the stars are aligning for the asset class overall there's always opportunity at the individual company level and you know finding these diamonds in the rough whether the asset class is performing or not, you've always kind of got that constant. But what's interesting now and what I think incrementally is exciting is just this asset class really is teed up, I think. And it's been beaten up. The valuations are stretched to the downside. And you're entering a time period where you could get a re-rating higher just for the asset class. Just getting it back to sort of equilibrium where it sort of normally is that 50th percentile. If that ends up happening, it's got huge implications

at the index level. And that's just assuming you're an average stock picker. And I like to think we're above average. So we could even do better than however the index is performed. So it's a really interesting time, I think. If I was to look at your buy decisions over time, I'm curious, like, how do you think about price when you're buying? Or how do you think about supply and demand, like I guess what I'm getting at is technical analysis. Are you, are you more likely to buy a stock on the way down or on the way up? And I guess given that you're buying fundamental momentum companies, as opposed to like compas that you think can have a turnaround, you're probably more likely to be buying a stock that's going up than down,

but I'd like to hear from you. Yeah, that's a good guess. We price momentum does tend to be highly correlated with companies that have fundamental momentum, right? It's really the market confirming that fundamental momentum. It's the market is telling you, yeah, we see it too. And we acknowledge the stock deserves to be rising. So I'm curious, like as a follow up, has it ever happened where you're looking at a company, you're doing the work, and you see all of this fundamental momentum, you see it in the data, You see it and you hear it from the customers, from the suppliers, from management, and then you look at the chart and it's going down and to the right.

How unusual. Have you ever even seen something like that? Or is that pretty, yeah? So, okay, so in that example, would you say, okay, the market's missing something? Or are you more likely to say the market knows something that we don't and therefore we're going to maybe take a break and watch and see if it stops going down? We don't like to catch falling knives. So for whatever reason it is, we don't need to be a hero and try to step in. And we're going to let the market tell us when it's ready to embrace those fundamentals.

And if it's not, for whatever reason, we'll just wait until things settle down a little bit. We want to see it just neutral at a minimum in terms of that sort of price momentum element of things. I love that answer. Because oftentimes fundamental investors will say, like, no, no, no, there's value here and the market is getting it wrong. But ultimately, the market is the ultimate arbiter of what something is worth. And it doesn't mean that the market's always right. But I love your answer of respecting price and respecting other investors. So then we like the stock, but we'd rather it stop crashing and maybe at least stabilize before we try and buy.

Yeah. And I think the biggest mistakes people make is they sell. their winners too soon and they hold their losers too long and I think guilty the latter part of that statement ties in with what you're talking about people just yeah they just I think when they sell a losing situation they feel like you know they're locking in a loss forever right and it's you know humbling and yeah I think there's a lot of hubris in this industry and people say you know if I liked it at 20. I love it at 12.

And I'm going to triple down. And someday I'm going to get rewarded for this. And, you know, someday. You only try that so many times before you realize, all right, that maybe is probably not the best way to invest. So I actually am not to brag. I'm pretty good at taking losses. I don't take big losses.

I take losses pretty quickly. Unfortunately, the selling too soon part of it is something that I just can't shake. So riding a winner to forget about to completion. nobody's to sell at the top. But how do you, how do you say that, yeah, we're up 175 percent, but this business still has legs? Like, what is the sell discipline? Are you more likely to sell once a company's peaked and the business momentum is rolling over? Or what does a sell discipline look like?

Yeah, no, great question. And it does play into what I think we're pretty good at. We're good at finding big winners, but we're also good at damage control and selling our losers quickly. And what we look for is, you know, go back to what I said before about fundamental momentum. Again, fast growth and underestimated growth. We're looking for fatigue in that fundamental momentum as it relates to what, when we're going to actually start to sell or look to sell. You know, is a company back to, you know, look at the underestimated portion of that fundamental component. Are they showing less upside than they used to?

Are they getting to the same upside in a lower quality fashion? You know, they beat by, they beat earnings per share by 10% this quarter, same as what they did, the prior three quarters, but they got there by having a lower tax rate. Or they got there by cutting a bunch of R&D research and development expenses, you know, cutting muscle essentially. That could be generating revenue down the road. or maybe they got there by pulling forward some revenues from the next quarter and you see day sales outstanding spike as a result. So like there's ways to gauge quality of upside and we're always very in tune with that and trying to sense if a company is reaching to show the same kind of upside that they had shown. So that can be a trigger for us to reduce exposure. And usually it's

not a black and white situation. Usually you're getting kind of the first signs of weakness and maybe lower quality earnings reports or data points. And you're faced with, is this the beginning of the end? Or is this just a, you know, one quarter blip or one off data point that I need to be cautious about? That's usually the situation you're dealing with. And then, you know, in that case, we might reduce, let's say, a quarter of the exposure or a third of the exposure and kind of wait and see. And if there's follow-through data points that look more cautious, maybe we'll cut it further from that point. So it's, it doesn't, you know, you have to be open-minded, I guess, about kind of reading the T-Leat. Brandon, the phrase that you're looking for here is

it's an art, not a science. I was about to say that and could not agree with you more. Yes, it is that. I've looked at the past at the history of corrections for just like the Russell 2000 itself. and it's, you know, small caps are more volatile than large caps historically. I imagine you being in a more concentrated manner of the small cap universe and in the small cap growth that I'm guessing here, but your gains are probably bigger in the up years and your losses are probably a little bigger in the down years. Is that volatility ring true to you? Yeah, that probably is true on average, but I don't think we're just like a high beta play on, you know, the markets overall, which is essentially what I think you're saying.

You know, our beta, as I see it, you know, in most snapshots in time is pretty close to one. But a lot of times when you're finding company-specific situations, you're in your own kind of world. I mean, this year is a great example of that small caps are kind of muddling along and, you know, they're up a little bit. And our small-cap growth fund is up 27 percent, right? Yeah, I'm looking at your returns right now. You're definitely not, you're not hugging an index by any means. Your returns seem to march their own beat. That's accurate, yes.

And that can work in down markets, too. Like, we've seen big drawdowns before in the asset class, and sometimes, you know, we're down substantially less. So it's, it's, I can't tell you, you know, it's always one for one, T, you know, like described like the way you described it in the question. Yeah, it's not bad. It sounds like you insulted them a little bit. No, not at all, not alone.

Brandon, when you're, how important are earnings calls to you? Yeah, they're important. They think they, they can kind of put meat on the bones of what's happening with the company. You know, we focus on the ones where we sense there's something we're not quite understanding or there's something controversial. If it's, if it's pristine and it's, you know, no problems and it's just a home run, And we actually will come back to those calls later, but the high priority calls are the ones where we're seeing something we didn't like and we want to get a better understanding of it

and gauge if it's a problem or not. So when you're listening to these executives talk about the quarter or give guidance, answer questions, how much do you believe them? Like, is it a case-by-case basis or oftentimes they're either sandbagging where they're trying to like lower expectations or they're just not really, they're just both. to you like how do you how do you know uh you never know we watch what people do more than what they say um you got to look at the financial statements um you've got a you know there's there's a track record too if you've covered companies long enough you uh sometimes management teams are

very conservative and and just always have a tendency to not stick their neck out and so when you see them sticking their neck out saying something positive you know it must be really positive because it's very out of character for them to sort of be hyping anything. And then you have the opposite situation where management teams are just inherently hypesters and you just have to kind of discount everything they say because you just, you know, you don't know if they're BSing you or not. So it's, it's case by case, but it's, we try to, you know, try to navigate that as best as we can. And it's, it's, there's definitely a bias for management to be promotional. And I think we have to just accept that. And it's just inherent in investing.

What are the conversations with clients like these days? Are people just anecdotally, are people getting more excited about your area of the market? Or is it still a bit of, ah, but invidia? I think there's more excitement at the margin. But I do feel like there's still, and when you say our area, are you just speaking to the asset class, just small in general? Yeah. Yeah. I think it's getting the sentiment and the interest level does seem to be rising, but it's it does feel like it's still a little unproven. And I think that shows up in the valuation. You know, July was a big month for small caps. And they went from the 10th percentile relative to large caps to the 17th percentile. Is that performance or valuation? Or what is that valuation?

And this is this is not our data. This is, Jeffries has a really good small cap. strategists that we follow pretty closely and follow a lot of other ones too, but I think he's one of the best. And he's these percentile valuation ranks, you know, he rolls up like six different valuation metrics of small versus large. And my point was going to be despite the rally in July for small caps, they only went from the 10th percentile to the 17th percentile. And now, you know, month to date, they've pulled back a little bit. They're probably 15th percentile or thereabouts. So my point is they're still very down and out, and they're not getting a lot of love, and you're getting flickers of interest and, you know, money flows, but it's not like

this broad-based embracing of the asset class. And I think that's where the opportunity lies. You know, there have been periods of time when small caps dominated large caps, right? If you're looking back multiple decades in the late 70s, early 80s, small caps were just crushing it versus large caps for like seven years. And it's just, you know, just as one example. And like I said, right off the bat of the show, like they tend to kind of trade off, you know, decades at a time. At some point, it's probably going to go the other way where small caps lead sustainably. And, you know, we talk about small cap, you know, they talk about small caps on the media all the time, you know, from that point going forward.

But we try to say that people should skate to where the puck is going. I've been saying that a lot lately. Brandon, for people that want to learn more about your small cap growth strategy, where can we send them? Yeah. So it's called the Calamos Timpani Small Cap Growth Fund. The ticker is C-T-S-I-X. And the fund is, you know, started 13 years ago, I think. We've been doing this a lot longer than that.

I've been doing this 28 years, only in small and mid-cap-related stocks, always with this investment approach. We're pretty good at what we do, I think. We tend to generate outperformance relative to our benchmarks. And I think another thing, if I could just sort of add a couple more sort of competitive differentiators, you know, if we do have, you know, if you are going to be skating to where the puck is going and you think that small caps are where the puck is going. I think you should be trying to find a manager that is experienced, has a proven

investment approach like us. And another unique factor for us is we have a low asset base and we can navigate small cap investing more easily. We can ramp up positions quickly. We can reduce exposure very quickly. Our fund is about 300 and, you know, just over 300 million in assets. Some of our competitors have multiple billions of assets. So it's just harder for them to maneuver. We're true to the asset class. We're already small. And some of those other funds that are bigger are more smid to mid. And if all the action is going to be in small going forward, they're probably going to be feeling pressure to get smaller. And we're already there. So I think that's a unique kind of factor. And then last thing I'll mention is we do have some tax loss carry forwards. If you have

taxable investors. And so we'll be able to use those tax losses to offset realized gains in the future. So, you know, you look at our fund specific attributes, and then you combine that with an asset class that could have, you know, incremental love. And it's, it's kind of a fat pitch, if you ask me. I'm very biased, I know, but I also put my money where my mouth is and been, you know, just over the last several years, been continuing to add exposure. If you go into our SAI, you know, you'll see I've got the maximum amount of personal holdings in this fund as far as, you know, the different boxes that you can check. I put all my salary from last year and the year before and then some into the end of the

fund. So I eat my own cooking. I've just seen this work for for so long. It doesn't work every year, every month, but it does have a strong tendency to work. And, you know, we're seeing it now happen a year today. we go through these downticks here and there. And coming out of those down ticks, we tend to be really strong for long stretches. And I think, you know, we're eight months into this multi-year up cycle, if you ask me.

Love it, Brandon. I love that you eat your own cooking. We'd love to hear that. So I appreciate you coming on today. That was great. Yeah, my pleasure. Thanks for having me. Okay, thanks again to Brandon.

That was great. Go to calmos. dot com to learn more email us animal spirits at the compound news.com and we'll see you next time