Small-cap veteran eyes economical ‘powerboats’ in tough climate

According to Amy Zhang of Algiers, companies benefiting from favorable trends, such as cybersecurity, healthcare and aerospace companies, still offer opportunities despite the difficult economic climate.

The US small and mid-cap specialist, which was rated AAA by Citywire for most of 2019 and 2020, said Citywire Selector that companies with strong balance sheets and lower debt levels will adapt better to rising interest rates and inflation.

Zhang, who runs the Alger Small Cap Focus and Small Cap Growth funds, said a key aspect of his strategy is to invest in “powerboat” companies that can drive their own success.

“I would call the most economically sensitive companies ‘sailboats’. They are very easily toppled in the economic storm. We really want to invest in ‘powerboats’ that have their own value-creating, innovation-driven engine,” she said.

She said examples of companies like this were Bio-Techne, which develops chemicals and instruments for early disease detection, and cybersecurity firm Palo Alto Networks.

“Since the pandemic, everyone is much more aware of the importance of health. There is also a huge favorable demographic wind in terms of the aging of the world population and we wanted to invest in a company like Bio-Techne which saves lives, reduces healthcare costs and increases productivity,” she said.

“Cybersecurity is experiencing a massive growth cycle due to the increasing number of cyberattacks and geopolitical issues. Initially a dominant player in firewalls, Palo Alto has now established a holistic cybersecurity platform.

Zhang said the aerospace industry was also in an early cyclical recovery period after the pandemic, and parts supplier Heico was well positioned to benefit.

“We believe there is going to be a multi-year cyclical recovery in this sector. Heico is a very high quality company that is in the sweet spot. We are far from normalized demand levels,” she said.

Zhang said a strong balance sheet is a lifeblood right now, and healthier companies may find themselves able to buy out over-leveraged competitors.

“In this market, cash is king. The company with a strong balance sheet is likely to outperform the company that is heavily indebted. It’s also a great time for companies that have a track record of acquisitions like Heico and Palo Alto,” she said.

Commenting on the selling points of mid-caps in the current climate, Zhang said valuations have become more attractive relative to large-caps, while being less “street-covered” and offering similar growth potential to small-caps. .

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