In an article from Royce Investment Partners, portfolio managers Jim Stoeffel, Brendan Hartman, Jim Harvey, and Kavitha Venkatraman shared where they believe the best opportunities for long-term investments in small-caps are.
With the belief that homebuilders have the inventory to meet building demands, the managers called the housing sector “positive,” even though existing home sales have declined as homeowners don’t want to give up their cheap mortgages to take on higher interest loans. As interest rates rose last year, shares of homebuilders in the U.S. fell dramatically and though they’ve recently rebounded, they are still very low. Housing is a cyclical industry, and this time around it remains “very well capitalized compared to prior economic cycles,” the managers write.
Though the pandemic hit the outdoor recreation sector hard, “valuations have gotten attractively low,” and Royce has begun dipping back into it, the article reports. Looking for companies that adapted to the pandemic limitations, Royce has found recreational marine companies, on both the retail and manufacturing sides, a particularly valuable niche. RV companies, as well as those in the hunting, camping, and fishing realms are all holding up, especially with increased demand coming out of the pandemic.
While the Royce team is positive on tech stocks, they pointed to the semiconductor equipment niche as a particularly good opportunity. Many small-cap equipment suppliers benefitted from the consolidation of the supply chain, including “picks and shovels companies” like Ichor and Ultra Clean that supply products to the likes of Applied Materials and Lam Research, which are some of the biggest original equipment manufacturers. Meanwhile, technological advancements in things such as the design of 3D semiconductors has bolstered companies that do back-end testing and capability measuring like Cohu and Onto Innovation. Semiconductor demand will keep growing, especially as AI technology advances, and as countries begin to build their own factories in an effort to boost supply chain security, there will be a substantial number of restoring projects. That will lead to an increase in demand for energy, EVs, and the domestic construction market—all areas ripe for long-term investment opportunities, the article contends.