Awaiting a Return to Rationality in SMID-Cap Growth

Portfolio Managers Jonathan Coleman and Scott Stutzman discuss the unusual trends they have observed in the small- and mid-cap growth space, where money-losing companies have outperformed profitable businesses through the distinct market cycles that have occurred since late 2019.

Key Takeaways

  • Since late 2019, three distinct cycles have occurred in U.S. equity markets: The peak in late 2019, the panic selloff in February driven by the expansion of COVID-19 and the rebound that started on March 23 and continued through the end of the second quarter.
  • Throughout these cycles, we have seen money-losing companies consistently outperform moneymaking companies – a rare situation that we think is bound to eventually reverse.
  • We believe companies with durable, self-sustaining business models and reasonable valuations have the best potential to generate positive returns in the long-term, despite the irrational environment we are currently experiencing.