Jul 6, 2024 · 31 min
Small-cap investors weigh AI exuberance against business quality
IC025 Investor Insights: Small Cap Gems & Common-Sense Investing Ideas
The episode tests fashionable AI and software narratives against valuation, cash flow, consumer evidence, and the resilience of simpler businesses.
- 1AI may reshape markets, fund management, and energy demand while leaving investors exposed to valuation and competitive risks.
- 2Footwear trends show how everyday consumer observations can reveal both emerging winners and warning signs in established retailers.
- 3Craneware, ActiveOps, and James Latham illustrate the trade-offs between specialist growth, expensive valuations, and dependable simplicity.
Don't miss
The hosts contrast fashionable AI and software companies with James Latham, a simple timber distributor whose reporting and dividend history make the quieter case compelling.
The brief
Lee and Chris open with UK small caps, using System1’s strong share-price performance to frame a broader discussion of growth, valuation, and observable business trends.
AI moves from investment opportunity to market risk: the hosts question technology valuations, consider exposure through Microsoft and Alphabet, and examine its effects on active fund management and energy demand.
A Peter Lynch-style detour into footwear turns shopping observations into investment evidence, contrasting Nike’s decline with newer brands, Birkenstock’s revival, and ASICS’s exceptional performance.
The stock review tests different kinds of opportunity: Shoe Zone faces warnings, Craneware benefits from complex US healthcare payments, and ActiveOps offers growth at a demanding valuation.
James Latham provides the episode’s counterpoint—a straightforward, family-involved timber distributor with clean reporting and dividends—before the hosts return to balance, quality, and price.
What was said on this episode
27 statements · 16 positive · 9 negative · 1 mixed · 1 neutral
System1’s valuation is reasonable relative to forecast earnings growth.
“it's trading at about 30 times forecast earnings, which in isolation looks quite full, but not if you consider those earnings are forecast to rise by 40-odd percent”
Listen at 0:14
Small-cap stocks currently offer unusually attractive investment opportunities.
“there hasn't been a better time current for a long time, in our opinion”
Listen at 2:03
System1 could grow to ten times its current size.
“it could be 10 times the size and still be quite a small company in the grand scheme of things”
Listen at 4:36
The artificial-intelligence boom is still in its early stages.
“this AI boom that conceivably is still in an early stage. We're really just at the start of it”
Listen at 5:54
Nvidia must sustain strong performance to justify its valuation.
“the likes of Nvidia have got to keep delivering to justify this kind of valuation”
Listen at 6:06
Investors seeking AI exposure should favor major technology companies.
“our view is to follow the giants really”
Listen at 7:51
Robinhood’s Pluto acquisition encourages more active trading.
“all this is trying to do is encourage you yet more active manic trading”
Listen at 8:49
AI-driven passive investing threatens large-cap active fund managers.
“it's a real threat to large-cap fund managers”
Listen at 10:36
Google’s carbon emissions increased 50% since 2019.
“Google carbon emissions are up 50% since 2019”
Listen at 11:09
AI is making major technology companies more capital- and energy-intensive.
“the nature of their businesses are changing dramatically”
Listen at 12:04
AI-related changes create risks to major technology companies’ future returns.
“the investment appeal in terms of the future returns, there is a risk there”
Listen at 13:13
Investors should act cautiously and consider reducing technology exposure.
“be careful, be rational, maybe prepared to take some money off the table”
Listen at 13:18
Nike may struggle to regain market dominance.
“it's hard to see how Nike can come back from here really, can it? Can it become dominant again? I'm not so sure.”
Listen at 14:49
On Holding’s shares have performed exceptionally well.
“On-holding shares have been going great guns, been absolutely flying”
Listen at 16:28
Birkenstock has become highly popular despite its formerly unfashionable image.
“a brand that was never viewed as on trend or whatever is suddenly super popular with everybody”
Listen at 17:13
ASICS shares approximately doubled over the past year.
“Asics as well, the Japanese listed company, its shares have, I think, doubled over the past year”
Listen at 18:16
Observing consumer trends could have identified ASICS as a profitable investment.
“you could have made a decent return on that stock”
Listen at 19:06
Shoe Zone’s earnings forecasts were materially reduced.
“its forecasts have been cut materially”
Listen at 20:57
Craneware’s healthcare data could create a significant AI opportunity.
“this could be a big AI play as well”
Listen at 22:40
The complexity of US healthcare payments creates opportunities for Craneware.
“A minefield creates opportunity”
Listen at 23:28
ActiveOps remains richly valued at 100 times forecast earnings.
“Even at the current level now, it's on a P/E rating. It looks pretty rich, 100 times forecast earnings.”
Listen at 25:35
ActiveOps may eventually justify its current valuation through earnings growth.
“hopefully it'll go on to justify its valuation”
Listen at 26:05
James Latham has generated strong free cash flow and growing cash balances.
“free cash flow has absolutely been terrific, and cash has been growing”
Listen at 27:23
James Latham increased its final dividend by 20%.
“they're rewarding their shareholders with yet another big increase in the final dividend, 20% increase in the final dividend”
Listen at 27:31
James Latham shareholders received 273 pence in aggregate dividends over ten years.
“over the past decade, shareholders will have received aggregate dividends of 273 pence”
Listen at 27:49
James Latham’s decade-long total return outperformed comparable retail and software companies.
“James Latham would've outperformed. His total return would've been better than all of them.”
Listen at 28:56
James Latham performs very well within its mundane timber-distribution sector.
“it's just a cracking little business that does what in its relatively, should we say, mundane sector, it does really well”
Listen at 29:12
Statements are attributed to the speaker as said on the episode and reflect their view at the time, not PodLume's. They are not advice.
Featuring
Craneware plcBooks & mentions
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