- Brandon Nelson's small-company stock fund had returned 37.1% to investors as of October 7, more than triple its benchmark.
- He told Business Insider about 3 themes that have helped him succeed in 2020 and that he sees as long-term changes for consumers.
- Nelson adds that small-cap growth stocks are historically cheap today, which makes him even more optimistic about future returns.
- Visit Business Insider's homepage for more stories.
Brandon Nelson has been running his mutual fund for almost 10 years, and Wall Street has been treating small-company stocks like the minor leagues the entire time. It doesn't bother him.
Judged against his peers, Nelson is nobody's backup. His Calamos Timpani Small Cap Growth Fund has returned 252% in that almost-ten-year stretch, a return that tops that of the S&P 500, small-company indexes, and most of his peers, according to Morningstar.
This year alone, Nelson had hauled in a 37.1% return as of October 7. Morningstar data shows that's more than double the typical return for the category and more than triple the gain logged by the Russell 2000 Growth index, his benchmark.
He thinks investors' views of those companies are due to change. And when they do, even better times might be on the way for his sector.
"It's got a lot of fundamental strength and it's very inexpensive versus large-cap growth," he said of small caps in an exclusive interview with Business Insider. "If money's going to reallocate away from large-cap growth, it seems to me, small-cap growth is a logical place to go."
Nelson says there are essentially two types of growth companies in his portfolio: Cyclical companies that will perform the best when the economy is firing on all cylinders, and secular growth firms benefiting from crucial trends. The second group dominates the fund today.
His key themes have been very successful in the last six months, and some have been grouped into categories like "post-pandemic winner." Nelson emphasizes that he's investing in shifts in consumer spending and the economy that should last a long time, not just the beneficiaries of a fad in 2020.
Investments in homebuilders LGI, TopBuild, and lender Redfin, as well as building-products companies, have paid off handsomely for Nelson. He's continued to add to those positions recently.
"Homebuilding as a theme could have legs above and beyond what a lot of people think," he said. "These record low mortgage rates made it economical for people to afford a new house, and low inventory levels of existing homes have caused people to push to want to build new homes."
People are also "nesting" and spending more time at home since residences are doubling as workplaces and tripling as schools for some people and families. That's been a boon to one of Nelson's largest positions, the backup power-generator maker Generac.
"You just can't afford to go without power for a sustained period of time. There's just so much riding on it," he said. Nelson says he sees a lot of potential for the company because 96% of homes don't have a backup power source.
(2) New recreation
The drive to have fun in socially distanced ways has become an important opportunity for the fund as well, Nelson said.
"The dollars that would have been spent on going on a cruise or flying to those theme parks were still available and got re-deployed to areas that were normally slower growth," he said. "[Consumers], for instance, bought a boat, or rented a boat, or rented an RV, and went camping or boating or fishing."
His investments in that theme include outdoor sporting-goods retailer Sportsman's Warehouse, boat dealer OneWater Marine, and RV maker Thor Industries.
Shopping from home and working from home have both been rewarding themes for Nelson, and one of his most successful recent pickups is Stamps.com, which has made a powerful recovery after some brutal sell-offs in 2018-19 and early 2020.
"Stamps.com is seeing a pretty sizable uptick in business and just sort of riding that wave of more e-commerce taking place," he said.
Another somewhat unexpected approach to that theme is his largest position. He says Lithia Motors is a high-quality, successful nationwide auto retailer that's rolling out online features that could improve its standing.
"They're rolling out a new service called Driveway, which is exciting … It's an e-commerce platform for you as a consumer to be able to buy and sell new cars and used cars," he said. "They're rolling out an eCommerce service feature where you don't have to leave your house to bring in your car for servicing. They'll come to you, pick up your car and bring it into the shop."
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