Beck adds, “Whatever recent period you want to pick, the market has corrected on the order of 10 to 12 percent. And that has helped the valuation a lot.” That has made small caps a bargain versus large-cap stock and has also improved “on an absolute basis,” he adds.
The Delaware Small Cap Value Fund, a $2.6 billion fund, recently had a P/E ratio of 14.27. The Delaware Small Cap Core Fund is a $336 million fund with a recent P/E ratio of 17.83.
Those numbers have come down, but they are still high historically, Morris said. Nevertheless, he believes that small caps are now more reasonably priced. Beck said there has been a 6 percent rally in small-cap stock value recently and more is coming.
Where?
Beck and Morris said they now see opportunities in consumer discretionary, finance and energy stocks. The last were hit very hard, he said.
“In the energy area, there has been tremendous carnage,” Morris said, “especially in some of these smaller shale plays. Some are down 35 percent in the month of September alone. And that has created opportunity.”
He explained that, after several years of underperformance, some consumer stocks are primed for gains.
Neither manager would name the specific companies they are purchasing. However, both funds, in recent reports, were heavy on finance and technology companies. Among their recent favorites are Synopsys, XPO Logistics, Helix Energy Solutions Group, Proofpoint Inc. and East West Bancorp.
Morris also predicted that M&A activity is also ready to pop.
“And there’s plenty of capital out there,” Morris said, “either with corporations that are flush with cash in their balance sheets, or private equity firms looking at mergers and acquisitions.”