Small-Cap Growth Opportunities: Investment Themes in a Changing World

We believe there’s a very compelling case for small-cap stocks today. Of course, it’s still a very murky picture, and impossible to predict if the bottom of the market is truly behind us. However, a speedy and massive response from central banks and governments worldwide and improving health care data have combined with extremely oversold markets to catalyze a stock market surge that began on March 24. Historically, small-caps have tended to outperform large caps in the early days of a new bull market, and small-cap valuations look very attractive relative to large-cap stocks as well.

That said, not all companies will thrive despite the expansive stimulus and supportive Fed programs that have been put into place. Given the macro uncertainty and many moving parts in the market, we believe a selective and active approach are key to unlocking small-cap opportunities, with greater market inefficiencies in small-cap investing making manager skill that much more essential.

CTSIX: Investing in companies at the leading edge of new paradigm

We have currently positioned Calamos Timpani Small Cap Growth Fund (CTSIX) with select exposure to high quality cyclical growth names that can benefit from a rebounding economy. However, we remain tilted to high quality secular growth stocks with low debt levels and above average earnings visibility. Many of CTSIX’s holdings are benefiting from thematic tailwinds that we believe will become more powerful as trends emerge in the wake of COVID-19. Even when the pandemic passes, we believe these trends will endure.

(Note: please refer to the disclosures for additional information about the portfolio holdings that will be discussed below.)

1. Work from home (WFH). WFH is driving high demand for an array of technology solutions. For example, a ramp up in laptop computer and data center server purchases has positive implications for semiconductor companies such as Diodes (DIOD), Lattice Semiconductor (LSCC), and SiTime Corporation (SITM). Other potential WFH beneficiaries in CTSIX are providers of communication software and connectivity tools, such as Ring Central (RNG), Five9 (FIVN), Nice (NICE) and AudioCodes (AUDC), as well cybersecurity software protection innovators, such as Ping Identity (PING) and Varonis Systems (VRNS).
2. Play from home. Increased demand for streaming services and video games creates more demand for bandwidth to enable those services. Also, the play-at-home trend can buoy a wide variety of companies that support the connected TV ecosystem, like The Rubicon Project (RUBI), an innovator in advertising technology.
3. Shop from home/ecommerce. As consumers avoid shopping at physical stores, we see companies with proven ecommerce platforms and channels gaining an edge; CTSIX holdings that are supported by this theme include names like Chegg (CHGG), Yeti (YETI) and eHealth (EHTH).
4. Telemedicine. Telemedicine providers such as Teladoc Health (TDOC) and Phreesia (PHR) are making new inroads as people become increasingly wary of going to a hospital or clinic where COVID-19 infection risk is higher.
5. Home health. Hospitals are encouraging patients to be treated elsewhere if possible to free up beds for COVID-19 patients, which benefits home health companies such as Amedisys, LHC Group (LHCG) and Addus Homecare (ADUS). Also, home health companies are eligible to receive stimulus dollars.
6. Public safety technology. The pandemic is likely to drive demand for mass communication tools for citizens of countries, states, and cities, as well as for tools that can help police departments handle potential social unrest (gunfire detection technology, body cameras and data management of body camera footage). CTSIX participates in this theme through ShotSpotter (SSTI), Everbridge (EVBG) and Axon Enterprise (AAXN).
7. Corporate bankruptcy and restructuring consulting services. Despite the stimulus dollars being deployed, there are likely to be some bankruptcies that will require consulting services from companies like FTI Consulting (FCN).
8. Health care equipment. We expect sustained tailwinds for Itamar Medical (ITMR), a manufacturer of at-home sleep apnea tests, as well as for manufacturers of masks, face shields and ventilators.

Conclusion

The small-cap space has long been the home of many innovative companies, some of which have grown into large-cap market leaders. As the world adapts to the challenges created by COVID-19, we see small-cap companies providing compelling solutions that create investment opportunities. Our fundamental research has led us to many stocks in this less-followed area of the stock market that can potentially benefit in this new world.