Manager Commentary, 3rd Quarter 2019
Stick to your Knitting
The Russell 2000 Index finished the third quarter down 2.40% and the Russell Microcap Index fell 5.45%. For the 52-week period both indexes are down despite decent performance year-to-date. The table below recaps the recent performance for all the Russell Indexes. The bright point is that small-caps outperformed large-caps and small-cap value beat small-cap growth in September. While one month does not make a trend, we are encouraged.
There is certainly a plethora of worries pestering the market: tariffs, interest rates, debt, recession, insider selling and the repo market to name a few. Many have argued that “this time is different” and all of these worries can be overcome. No matter what concern, the prevailing thought has been that growth will continue to be the place to invest because value is obsolete. We will tell you that “this time is different” does not apply to this thought.
Historically, we have always expected our investments to be valuable when they generated profits. But since the dot-com bubble, many profitless companies have been the sweet spot for investing. There is a place for these risky investments, but in our view they should not totally replace the more humdrum companies who do produce profits and have value. Investors are willing to pay more for the high-flyers when times are good because everyone is optimistic. When there is a wall of worry, as there is now with uncertainty in the market and the economy, value companies in our opinion will garner attention because they are cheap, and the fundamentals are solid and not a pipedream.
Besides focusing on these solid value investments, we also like companies with little or no debt. Perritt MicroCap Fund has almost 30% of its holdings with zero debt and Perritt Ultra MicroCap Fund has 48% with no debt, which compares to the Russell Microcap Index holding only 7% of companies with no debt. Even in a low interest rate environment, it is important to us that a portion of our investments are unencumbered. In our opinion, these will also be some of the most reliable companies in the microcap space.
We don’t think “this time is different.” We will stick to our knitting of seeking to be rewarded by finding solid micro-cap companies. Some of the best times for investing have been in difficult periods which gives us a chance of participating in the recovery.