00:00 Speaker A
Year to date, the Russell 2000 is outperforming the S&P 500. With investors rotating out of some of the biggest tech names, could this be the start of a true more sustainable rally in small caps? John Campbell, Allspring Global Investments portfolio manager of small and mid-cap ETFs, joins me now for this week’s ETF report brought to you by Invesco QQQ. Thanks so much for being here and, um, it has been an interesting journey for small caps and for small cap investors who have been holding out hope for a long time. And then finally we’re starting to see some um, catch-up performance here. How sustained do you think it’s going to be, John? Um, given that, you know, we’ve seen kind of hopes be dashed before.
00:53 Speaker B
It has been a long time of hopes uh somewhat dashed for small and midcap stocks. probably about 20 years, uh if you look back, they’ve underperformed. Um, but I do think that this is a uh potentially a durable uh rotation uh partly because large cap stocks have gotten pretty expensive and it’s probably for a good reason because they’ve been generating uh the best earnings growth. But this could be the year where at least the earnings growth rates may converge where small and midcaps uh growth rates are approaching what we’re seeing uh in large caps. But I expected that might happen last year, but it didn’t quite play out that way. But we did see investors start to get ahead of that and uh even looking back to say maybe last November, uh small and midcaps have done better than their large cap counterparts.
01:45 Speaker A
Um and what needs to happen for that to keep working? Do we need to see for example, more rate cuts happen?
01:54 Speaker B
I think that uh the rate cut cycle has played into the rotation that we’ve seen so far. It would be helpful for uh additional cuts, although it’s probably unrealistic to expect those in the first half of the year. But even if we don’t get significant rate cuts, just a a decent strong nominal growth in the economy is good for small cap stocks. So, uh we’ve got lots of stimulus in the system uh with the one big beautiful bill and uh lower tax rates and expensing on uh CapEx. Um, we’ve got the job market is is hanging in there and so consumer spending has been okay. Um, and then I do think that the AI boom is going to rotate somewhat away from the enablers into companies that are adopting AI to improve the productivity of their own businesses. So, I think that could help uh smaller cap companies uh compete a little bit better than maybe they have in recent years.
03:00 Speaker A
Um and I’m curious also what kind of sort of small and mid cap companies have done better, right? At one time we were watching um when there was more speculative behavior in the market, um a lot of, you know, if not meme stocks, just more speculative stocks. It seems like some of that has washed out. So where are we now and what’s doing well?
03:26 Speaker B
Yeah, that’s a great question. And usually at the beginning of a a a small cap rally, so basically once the the rebound happened after liberation day and people sniffed out, you know, further rate cuts and and potential tax cuts, then there’s kind of a rush to high higher risk type stocks or higher beta, and as you mentioned, even like the meme type stocks or stories. Um, so last year was kind of a blend of what you would call low quality stocks like that, but um under the surface high quality uh companies with high cash flow generation and and other good quality metrics, also did well. So it was kind of a tale of of both worlds, low quality plus high quality. Um, we are seeing that now uh quality definitely uh has mattered more in the last uh month or so. And with our process, we’re looking for like a good combination of quality earnings at reasonable prices with some momentum or support from the market. And um that combination is working really well right now.
04:31 Speaker A
Yeah, and it’s interesting, you actually brought us some stock picks, not just ETF picks, but stock picks. StoneX is one of those companies which is the big um financial services firm there. Um why do you think now is a good time? And we we’ve seen financial stocks, the larger cap financial stocks kind of get get smacked recently.
04:54 Speaker B
Uh indeed. And uh so StoneX is, uh obviously, we’re talking about small and mid-cap stocks. I think it’s about a 6 and 1/2 billion market cap. And they like to play in areas where the big banks or big brokers, um don’t necessarily have the strongest presence. And so their history goes back something like 100 years, but they’ve grown a lot through acquisition. They’ve they’ve got a well entrenched position in the physical trading of commodities and metals. Um last year they did a transformative acquisition of another uh company called R.J. O’Brien, which made them now the largest non-bank futures commission merchant, and so they’re seeing fast growth in their derivatives business and market making. They’re also in in the payment space. So, um I think their most recent uh earnings report, their top line growth was 47% year over year, bottom line, 63%. So really fast growth, but it still trades at reasonable prices.
06:01 Speaker A
And that stock has uh really outperformed over the past year and especially this year, considering as I said, what we’ve seen elsewhere in financial services. Um Urban Outfitters, that’s a good one um that that you guys like also, um and one that that kind of was languishing for a while.
06:20 Speaker B
Indeed, it was a it was out of favor. They really needed to, um, to fix uh a lot of aspects of their business and over the last few years, they really have done that. They’ve concentrated on like getting the size of their stores right. They’ve really done a good job of managing inventory so that they’re selling more product at full price and and less markdowns. And then just what I would call good blocking and tackling uh in the business. And so, uh good marketing, uh good inventory management. It’s interesting that so their their flagship brand, Urban Outfitters, uh has really been uh kind of refurbished, uh but they also own Anthropology and a brand called Free People. And then uh a small part of their business but really interesting is a service called Nuuly, which is a subscription clothing busi business. So, um kind of a combination of good retailing with some innovation has has really done uh wonders for the stock.
07:41 Speaker A
Right. Nuuly is that uh that clothing rental business. And by the way, coincidentally, Urban Outfitters is reporting after the close today. So we’ll see um how those various business lines are doing. John, thanks so much. Appreciate it.
07:54 Speaker B
Thank you, Julie.
07:56 Speaker A
Take care.