Toronto Firm CRIMSON Crushes U.S. Small-Cap Index With Virus-Proof Bets

By October 10, 2020 March 12th, 2021 No Comments

Ken Jesudian
Courtesy: Bloomberg


Small companies have been a poor place to hide in an economy roiled by Covid-19, but one Canadian fund is beating the market by picking the ones that are thriving in the work-from-home era.

Crimson Asset Management’s flagship fund, which holds stocks with an average market value of $3.2 billion, has gained more than 23% this year through Thursday, crushing the Russell 2000 small-cap index’s 0.4% return and the S&P/TSX Composite Index’s 0.5% total loss. (Returns are in Canadian dollars and include dividends.)

Small-cap investors haven’t had an easy time in a market dominated by bigger companies, especially household names like Inc. and Apple Inc. Some smaller firms lack access to capital or have business models that just don’t fit with the times. Why own Cineplex Inc. when you can have Netflix Inc.?

“They’re so recognizable, it just feeds on itself,” Ken Jesudian, the co-founder and chief executive officer of Toronto-based Crimson, says of the fascination with megacap U.S. tech companies. His Crimson Capital Growth Fund isn’t allowed to buy any of them; its focus is companies under $4.5 billion in market value.

Jesudian’s method is to look for the same attributes found in big-cap superstars — high margins, good balance sheets and pricing power — but in firms that are off Wall Street’s radar. When the pandemic hit and stocks sold off, Crimson’s staff did 70 calls with companies in six weeks, Jesudian said. They bought 14 new positions and added to some existing ones.

Among picks that have surged since the March selloff are furniture seller Wayfair Inc., bubble wrap maker Sealed Air Corp. and auto dealers Penske Automotive Group Inc.

They stand out at a time when the Russell 2000 — which trounced the S&P 500 over a two-decade span from 2000 through 2019 — has underperformed.

Wayfair, a Crimson favorite, was worth more than $10 billion in January and dropped as low as $2.2 billion in March, firmly in small-cap territory. Now it’s worth about $28 billion after the stock’s 12-fold rise from the bottom.

“The U.S. home is by far still the greatest, biggest asset class and they could benefit tremendously for years with this phenomenon of ordering home furnishing products from your living room,” Jesudian, 48, said in an interview.

Charlotte, North Carolina-based Sealed Air makes packaging materials that are in high demand with the rise in online orders. It’s up more than 140% from its March low.

The pandemic is also encouraging driving over public transit, providing a potential boost to auto dealers including Penske. Jesudian likes it because it’s diversified across different vehicle brands and lines of business. The stock has rebounded 161% since the March selloff.

Penske’s largest division is parts and service, which accounted for 36% of the company’s total gross profit, Bloomberg Intelligence analysts Kevin Tynan and Andreas Krohn wrote after the company’s second quarter results.

View original article on Bloomberg