Why some small companies are better positioned for a crisis

By Greg Dalgetty | June 4, 2020 | Last updated on June 4, 2020
3 min read
Man stopping line of dominoes from falling

Equity markets have rallied considerably since the Covid-19 market crash in March, and small caps, in particular, have proven resilient.

From March 19 to June 1, the S&P/TSX small cap index rallied by more than 40%, compared to 24% for the S&P/TSX 60 index. European small caps have also fared well, with the MSCI Europe small cap index gaining close to 30% over the same period.

Experts say the pandemic has given smaller companies an opportunity to exploit one of the advantages they hold over large companies: the ability to react quickly.

“[Smaller companies] can make quick decisions that will have a big impact, because they can change their business models quicker than large companies,” said Martin Fahey, senior vice-president, portfolio manager and head of Mackenzie Investments’ Europe team in Dublin, and manager of the IG Mackenzie International Small Cap Fund.

Don Walker, portfolio manager with PenderFund Capital Management Ltd. in Vancouver, manages Pender’s Small/Mid Cap Dividend Fund. One of the fund’s holdings, Richards Packaging Inc., a manufacturer of plastic and glass containers, saw sales spike in the wake of Covid-19.

“[Richards Packaging] actually had 85% organic growth in their cosmetics segment,” Walker said. “It came from selling pumps and sprays to hand-sanitizing companies. They were sold out completely of this product.”

Other companies have also benefited from the Covid-19 crisis, even though their products aren’t much use for fighting the spread of the virus. Games Workshop Group PLC, a company that manufactures figurines used in miniature war games, is one of the holdings in the Mackenzie fund that has proven to be a “big winner” during the pandemic, Fahey said.

“[Games Workshop’s] customers are always looking for more time, and now that people have more time at home, they have more time to use their figurines,” Fahey said.

Of course, not all companies will come out of the pandemic stronger. Fahey noted that commercial real estate, for example, “is not well-positioned” for a post-Covid world, with businesses having realized they can do just fine with employees working from home, rather than at the office.

Other industries that may struggle to emerge from Covid-19, such as retail space, were likely facing headwinds anyway, said Marc Robinson, managing director of the investment team at Toronto-based FAX Capital Corp., a publicly traded investment holding company focused on the Canadian small cap space.

“Other than perhaps office real estate, Covid hasn’t really created new industries that are struggling — it’s just steepened the declines in industries that were already struggling, and we were avoiding those businesses anyway,” Robinson said.

FAX was able to take advantage of recent market volatility by acquiring a 6.5% interest in Points International Ltd., a loyalty program provider to the travel and hospitality industries.

For obvious reasons, the travel industry is struggling at the moment, although economists predict the sector will eventually rebound. Blair Driscoll, CEO of FAX, acknowledged it “could be a number of years” before that rebound comes, but remains confident it will happen.

“When things go back to normal and people gain confidence, I am a firm believer that [travel] activity will come back,” Driscoll said. “From our standpoint, it’s not a question of if, but a question of when.”

One of the things that makes this crisis different than the global financial crisis, Walker said, is that small caps have been much better at actively communicating their plans for a recovery to shareholders.

“Companies are trying to be a bit more transparent with the public to give them an indication of how they’re dealing with this,” Walker said. “I feel like how they’ve handled this has been more proactive than reactionary.”

Walker said he’s eyeing an economic rebound beginning in 2021, although he’s “very cognizant” of the risk of Covid-19 re-emerging and causing a second shutdown of the economy. He said he’s focused on making sure the companies he owns can “see the other side” of this crisis.

Fahey, meanwhile, said he views Covid-19 as a buying opportunity: “I see the crisis as an opportunity to buy good companies that will become better.”

Greg Dalgetty