Small-cap veteran eyes economic ‘motorboats’ in tough climate

Companies benefiting from trend-driven tailwinds, such as cyber security, healthcare and aeropace firms, still offer opportunities despite the difficult economic climate, according to Alger’s Amy Zhang.

The US small- and mid-cap specialist, who was Citywire AAA-rated for most of 2019 and 2020, told Citywire Selector that companies with strong balance sheets and lower debt levels will cope better with rising interest and inflation rates.

Zhang, who runs the Alger Small Cap Focus and Small Cap Growth funds, said a key aspect of her strategy is to invest in ‘motorboat’ companies able to drive their own success.

‘I would call the more economically sensitive companies “sail-boats”. They’re very easily tipped over in the economic storm. We really want to invest in the “motorboats” which have their own value-creating engine that is propelled by innovation, ‘she said.

She said examples of companies like this were Bio-Techne, which develops chemicals and instruments for early detection of disease, and cyber security firm Palo Alto Networks.

‘Since the pandemic, everyone is much more aware of the importance of health. There’s also a tremendous demographic tailwind in terms of the world population getting older and we wanted to invest in a company like Bio-Techne which save lives, reduces healthcare costs and increases productivity, ‘she said.

‘Cyber ​​security is in a massive growth cycle due to the increasing number of cyber attacks and geopolitical issues. Initially a dominant player in firewalls, Palo Alto has now brought out a holistic cyber security platform. ‘

Zhang said the aerospace industry was also in an early cyclical recovery period following the pandemic, and parts supplier Heico was well placed to take advantage of this.

‘We think there is going to be a multi-year cyclical recovery in this sector. Heico is a very high-quality company that is in the sweet spot. We are a long way from normalized demand levels, ‘she said.

Zhang said a robust balance sheet was a vital strength at this time and healthier firms could find themselves in a position to buy out over-leveraged competitors.

‘In this market, cash is king. The company with a strong balance sheet is likely to outperform the company that’s highly leveraged. It’s also a great time for companies with a successful track record of acquisitions like Heico and Palo Alto, ‘she said.

Commenting on the selling points of mid-caps in the current climate, Zhang said valuations have become more attractive compared with large caps, while being less ‘covered by the street’ and offering growth potential similar to small caps.

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