American Football and investing – can you pick a winning team?

Investment analyst Stephanie Moore looks at some of the US small-cap stocks that she thinks could potentially make the grade.

If you follow elite American Football, you’ll be familiar with the old cliché: ‘You build a winning team in the draft.’ The ‘draft’ in question is that time of the year when teams vie for the best talent, fresh out of college, hoping to build a successful franchise. Good or bad picks can often make or break a season.

While fund management might lack the razzmatazz of American Football, the fundamentals are the same. To deliver returns, you must carefully select the right stocks – and ensure they fit together in your portfolio. So, in the spirit of this perennial sporting event, we take a look at some of the US small-cap companies we think could potentially make the grade.

Building a team

The coach

All coaches are different. The same applies to asset managers. For our part, we believe an active approach is the best way to deliver results. That means in-depth, first-hand research to fully get to know your stocks. We also favour a long-term approach. We’re owners of companies, not just investors. This mindset helps us look beyond the short-term noise that might otherwise distract us from company fundamentals. Our goal? To deliver a strategy containing our highest-conviction investment ideas.

Offence

AnAmerican football team has two distinct units: offence and defence. Let’s take each in turn.

Offensive players are usually fast, agile, and able to move the ball down the field. They’re the prized players needed to win games. The small-cap world is also bursting with high-quality companies looking to stand out.

Take global digital consultancy firm Perficient. It helps companies create, engineer, and run digital solutions designed to transform how they connect with their customers. Like a good offensive player, the company provides vision and leadership – and can adapt its offering to meet specific client needs. In the fast-moving digital world, we believe it’s companies like Perficient that have the potential to put scores on the board.

Then there’s e.l.f Cosmetics. It has leveraged its beginnings as a digitally native company to listen to what consumers want and deliver products quickly, crucial to staying relevant in the fiercely competitive cosmetics industry. Driving growth has been a focus on offering ‘cruelty-free’, quality products at affordable prices. This strategy has appealed to a broad consumer base and allowed this small and nimble company to take market share from bigger players.

Defence

Every great team needs a great defense. And it’s no different in the world of asset management. In our view, a defensive element is essential to a well-rounded and diversified portfolio. Good defensive stocks can also potentially provide downside protection throughout different market cycles.

One US small-cap firm to highlight is Hostess Brands. It’s a leading bakery firm, making and delivering delicious treats – Ding Dongs, Cup Cakes, Twinkies and more – throughout North America. In a world of high inflation, its name recognition and supply-chain execution have allowed it to implement price increases while still growing its market share.

Casella Waste is another defensive mainstay. A waste services company, it provides everything from collection and disposal to recycling and commodity brokerage services. Its year-on-year revenue growth has been impressive. Casella’s balance sheet is strong, while we think its recent purchase of Canada’s GFL Environmental shows a company with excellent capital discipline and a focused growth agenda.  

We believe these dynamics stand both companies in good stead in the current challenging economic environment. They could therefore potentially make a solid backbone to any portfolio.

Final thoughts…

So, as the new American Football season gets under way, we will soon know which teams got their picks right and which teams missed out. As investors, we operate under slightly longer timeframes. Nonetheless, when we look across the US small-cap world, we see an array of high-quality, offensive and defensive names from which to choose. All you have to do is get your research right and have conviction in your choices. Game on.

Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Past performance is not a guide to future results.

Stephanie Moore is an Investment Analyst, North American Equities at abrdn.

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