A fund manager specializing in small cap stocks, who has outperformed 90% of his peers in the last year, shared his top 5 stock picks and explained how he minimizes downside risk in a volatile market segment.
While small-cap stocks offer high potential returns, they also come with greater risk due to their smaller market capitalization. Dave Harden’s approach with the SGI Small Cap Core Fund (BOGIX) is to identify small cap stocks with the lowest downside, allowing for the capture of upside potential with greater stability. This approach has proven successful, with the fund down only 2.2% since April 2022 compared to the S&P 500’s -6%.
Harden is CEO and CIO of Summit Global Investments. His review of every stock includes an assessment of 20 distinct data points.
Harden’s method involves a combination of quantitative and qualitative analysis, with 70% of the analysis based on quantitative factors such as earnings quality, valuation, and volatility. The remaining 30% of the analysis focuses on qualitative factors such as company leadership, and Harden actively weeds out companies with risk factors such as aggressive accounting, CEO problems, lawsuits, and litigations.
Harden told Business Insider that his top stock picks have strong potential for growth and stability. Two of these are boat producers, Mastercraft (MCFT) and Malibu Boats (MBUU), which have low valuations and are undervalued according to Harden’s analysis. Further, he believes that boating is becoming increasingly popular, and these companies are poised to benefit from this trend.
The other three stocks are regional banks: Metropolitan Bank (MCB), Merchants Bancorp (MBIN), and Franklin Covey (FC). Despite recent struggles in the financial sector, Harden believes these banks have attractive valuations and will not fail. Metropolitan and Merchants have low P/E ratios and betas, indicating lower volatility than the market as a whole. Additionally, regional banks offer a community feel and are less likely to experience a mass exodus of clients to larger institutions whenever a whiff of fear settles over the financial markets.
Metropolitan has a P/E ratio of 4, almost no debt, and a beta of 0.85, which means it’s less volatile than the broader market. Merchant has a P/E of 5.5 and a beta of 0.89.
Harden said, above all, Metropolitan and Merchants have attractive valuations, and he doesn’t believe they’ll fail.
Finally, Franklin Covey is a growth name with consistent earnings and loyal customers, offering products that help customers prioritize and focus on tasks. Harden believes that they do a good job in this space, differentiating themselves from larger tech companies such as Microsoft and Google.