Could small-cap stocks fare better on mega-cap tech rally?

While Wall Street waits for tech rallies to broaden out, small-cap stocks could present several opportunities in a less crowded space. Villere & Co. Portfolio Manager Sandy Villere shares his insights on the small-cap market while mentioning some of his favored stocks like Atlas Energy Solutions (AESI) and Pool Corp (POOL).

"They'll [small-cap stocks] catch up despite the fact they've lagged so far in 2024," Villere says. "I just don't think there's a good chance that they outperform during the rest of the year. Maybe large caps stall out mid-way through the year after a very big run-up."

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Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

JOSH LIPTON: Tech stocks leading the way for the S&P this year. But is the trade too crowded for everyday investors? Our next guest says it's time to look into small-cap stocks. Joining us now is Sandy Villere, Villere Company Portfolio Manager. Sandy, it is good to have you on the show. So you say it's time to commit capital to the small-cap, Sandy. Explain why. Why do you want to-- why do you want to be in those pint-sized companies right now?

SANDY VILLERE: Yeah. I mean, you just look back at last year and what a run that the large-cap growth names had, right? Like, up 46% if you look at Vanguard growth or something like that. So I think they've had a good run. And then you look at just valuation, the S&P 500 is trading well in excess of its 20-year average. If the 20-year average is 18.9 times, they're probably up at about 27 times. And you look at small cap, they are only trading at about 16.3 times versus the 20-year average of about 16.7.

So I think they've sort of been left for dead a little bit. And it's time to take a look at some of these smaller names that have the opportunity to outperform, given where large caps have run to.

JULIE HYMAN: Sandy, you're not the only person telling us this. And yet despite the seeming enthusiasm over small caps, they've been falling, right, this year. They've really been-- for the most part. We've had some blips where they've done better. What do you think the disconnect is here thus far?

SANDY VILLERE: What's interesting is small caps do really well coming out of a recession. They do really poorly going into a recession. And they do well coming out of it materially much better than what large caps would do. So it's been kind of a fits and starts as to are we going to have this soft landing, are we going into a recession, you know, where are we.

But I think-- I think they will catch up despite the fact that they've lagged so far in 2024. I still think there's a good chance that they outperform during the rest of the year as maybe those large caps stall out midway through the year after a very big run-up.

JOSH LIPTON: And let's get to some specifics picks here, Sandy. I'm looking at a few of names that you like. One is Atlas Energy, ticker AESI, has done much in the past 12 months. Sandy, it's down about 4% here. What are the catalysts do you think that's going to get this one moving higher?

SANDY VILLERE: Yeah. I mean, they just went public at the beginning of last year. So this is really a brand-new company but run by Bud Brigham that's had a great, great reputation in the oil field services area. But these guys are-- they're really mining and transporting sand in the Permian Basin. So we've done a lot of homework, and there's nothing that's going to displace sand that's as cheap to do horizontal drilling and fracking.

So they are building a 42-mile conveyor belt system called the Dune Express, where they're going to safely deliver sand to all their customers versus these terrible roads where there's fatalities with trucks and all these other things. So we like that as we get closer towards the end of the year. But they've got plenty of capital. And they're on time and under budget. I'll be-- I'll be visiting them in mid February, so I'll get an update then.

But I think this is going to work out well. And it's going to be a very high cash producer just with their current business. So we like it a lot.

JULIE HYMAN: Another one that you like is Pool Corp. And man, this thing has already been a monster, Sandy, with the exception of 2022. I mean, it's, what, had a dozen years at least where it's been in the green and notably soared during the pandemic, because a lot of people were spending time in their backyard pools. So what's the growth trajectory look like from here?

SANDY VILLERE: Yeah. So this is one that we've been involved with for a long time. I mean, we are-- we're long-term holders, but we bought this originally in 1997, believe it or not. And probably sold it in 2007 and then bought it back in 2010 and still own it. So we've been holding this for 14 years. So they were very nice years during COVID when everybody spent their money, as you mentioned, on their backyards.

But we think 2023 really troughed out. Earnings were probably 13.60. We think earnings in '24 will probably go to 15.50 And then in 2025, they could go up to $18. So we think there's a lot of growth just coming off of the bottom. And 2023 will truly prove to be a trough. And if you like a company that dominates, these guys are as big as their top 50 competitors combined. If you're buying chlorine for your swimming pool in Arizona, New York, or Florida, you're buying it through Pool Corp.

JOSH LIPTON: Sandy, is the bet there on this name that a lot of people are going to keep building new pools? Or no, it's-- or is it more about, you know, it's really just kind of maintaining the pools you've got?

SANDY VILLERE: Yeah. So it's funny, when we sold it back in 2007, it's because it flip-flopped. It used to be 2/3 boring pool repair and maintenance of your swimming pool. And then it flipped with the housing really booming. It flipped to really new pool construction. It became very cyclical. So now it's back to where it was, where they're not so dependent. And I'm going to say less than 20% on new pool construction, which will only see 70,000 pools put in.

But every time a pool is put in, that's more business for them. Because every seven or eight years, you got to replaster. You just have this big mess in your yard. And most people don't let it turn black or green. They tend to maintain it and keep up with it. So the majority of their sales are just boring repair and maintenance of your swimming pool. So we like it for that reason.

JOSH LIPTON: Sandy, it was great having you on the show today. I appreciate your time and those picks. Thank you.

SANDY VILLERE: Thank you. Thanks, Josh.