Jon Christensen, senior portfolio manager and analyst for KAR’s Small Cap Core portfolio, believes that the wind may have started to shift during the second quarter of 2021 after the low-quality rally that began in November 2020 and continued through Q1 2021. However, that rally still has some life.
After a very strong Q1 for most of the Russell 2000 with the index climbing almost 13%, things were a little more subdued with the index increasing a little over 4% in Q2. But some of the usual suspects continue to lead the market in terms of sector and quality bias. Those with high betas and more debt on the balance sheet continued to outperform their counterparts, and the market still favored lower-quality companies. However, Christensen believes fundamentals will come into focus as businesses try to sustain these high valuations.
Key Contributors and Detractors in Small Cap Core
To learn more about the top 5 contributors and detractors in KAR’s Small Cap Core strategy for Q2 2021 listen to the podcast above.
The Post-COVID Opportunity Set
Christensen believes the market has taken into account the return to normalcy with strong index returns over the past year.
“Valuations are being stretched as a result. So, the businesses with higher than usual valuations have high expectations built into them. Some may be able to grow and sustain this value, while others with small or no competitive advantages may struggle to meet expectations.
“Our goal is to buy those businesses that have temporary valuation disconnects so that we can take advantage. We need to have patience and diligence in researching for these companies while monitoring our existing holdings for changes in their shortfall investment stories. The post-COVID world will look very different in the years to come versus pre-COVID.”
This information is being provided by Kayne Anderson Rudnick Investment Management, LLC (“KAR”) for illustrative purposes only. Information contained in this material is not intended by KAR to be interpreted as investment advice, a recommendation or solicitation to purchase securities, or a recommendation of a particular course of action and has not been updated since the date of the material, and KAR does not undertake to update the information presented should it change. This information is based on KAR’s opinions at the time of the recording of this material and are subject to change based on market activity. There is no guarantee that any forecasts made will come to pass. KAR makes no warranty as to the accuracy or reliability of the information contained herein.