00:00 Speaker A
Another trend here I want to get you take on small caps. You say Brian, they have staged what you call here, it’s a low quality rally that is now ending. What does quality mean here? How how are you defining quality? And then are you are you suggesting okay, there’s going to be sort of a trade shift there?
00:13 Brian
Yeah, it’s one of the most overused word in our industry is quality, right? We need to define that. 2025 we had a lot of non earners, companies that weren’t profitable. Their stocks were working incredibly well as investors land grabbed around themes, themes like nuclear modular reactors for an example.
00:27 Brian
But that’s ultimately going to have to have to fade away. And what works in small caps over time are companies that have high ROIC, high have consistent profitable business models. and those companies were left for dead on a relative basis in 2025. And so that the market will eventually go back to trying to grab everything, they don’t know who the winners are, to saying I actually want to be more discerning. And in small cap it has paid over the years to be in those higher quality, profitable, high ROIC companies and today investors can buy those very, very attractive prices.
00:54 Speaker A
Are there any names there, Brian, you particularly like?
00:57 Brian
Yeah, it depends on the sector we’re talking about there, but as you think about um that that industrial complex, there’s names like a Mueller industries, a company that is exposed to the build out because they’re providing copper and piping into the build out, but they also have an incredible ability to continue to raise prices, take market share and use their balance sheet to make acquisitions to grow and expand their TAM. That’s a business that’s done the stock’s done well, but it’s grossly mispriced and undervalued in our minds given where we see the see the market going in small cap land in the future.
01:21 Speaker A
In terms of sectors you like, you highlight materials, you highlight industrials. There are offensive opportunities you say. How come, Brian? Is that is that more like is that cyclical or tho- tho- no, those are secular calls?
01:34 Brian
Well, they’re more cyclical, but they also have secular opportunities. So the old economy stocks, some of the materials, some of the industrials, uh they’ve they’ve they’ve been pushed aside for the faster growing tech right now. But as I see the AI CAPEX cycle play out and I I see the economy get this stimulate stimulus from fiscal and monetary, we’re going to see transportation stocks, the chemical stocks, all of a sudden become more relevant. You’re going to see revenue begin to inflect in a positive way. Margins will expand for the first time in a long time. And investors will say, wow, there’s this opportunity still in these old stogy old economy stocks.
02:08 Brian
And so industrial materials are interesting and I would layer in healthcare. Healthcare in my mind has had peak volatility, peak uncertainty, peak peak regulatory oversight and as that fades away, there’s opportunities in healthcare for for those businesses to evolve with the evolving landscape which includes AI but also more regulatory certainty. And that category is uh well priced today.