A stock picker in Wall Street's top 1% tells us how he thrived with 'companies you wouldn't find on your own' - and shares the top 4 investing themes he's playing in 2020
- Chris Retzler has been the best small-company investor in the US this year, as his Needham Small Cap Growth Fund has rocketed 52% higher. That puts it in the 99th percentile relative to comparable funds.
- Retzler thinks a first-quarter market correction is likely, and tells investors where they should look for the biggest gains in 2020 and beyond.
- He's advising investors to position for that correction and for long-term growth in wireless, streaming and military spending.
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There's a specialized type of hunting that goes into investing in the smallest companies, and Chris Retzler nailed it this year.
"We're trying to add our value by investing in those companies that you wouldn't normally find on your own," says Retzler, who manages the Needham Small Cap Growth Fund.
It was the best US small-cap fund of 2019, and its 52% year-to-date gain is roughly double the Russell 2000 Growth index or the S&P 500. That puts him in the 99th percentile relative to peers, according to data compiled by Bloomberg.
Retzler's investments are concentrated in tech companies, and since most of them are far from household names, he says great management and "wide technological moats" are critical.
That helped contribute to successful investments in semiconductor equipment, like his two largest positions in Photronics and PDF Solutions, and his third-largest, in specialty materials maker Aspen Aerogels - a stock that has more than tripled in value in the last year.
Smaller companies have lagged their bigger peers for years, and Retzler sees more turbulence ahead as some of 2019's biggest winners are likely to be sold off in the new year.
"It would not surprise us to see some 5% to 10% correction in the first quarter of next year," he told Business Insider in an exclusive interview. "I am not making the call that it's 5% or 10% from this level, but I do think the market is due for some correction."
His first piece of advice is for investors to plan ahead and be ready to take advantage of the opportunities that that selloff would create.
"You sell small-cap companies when you can, not when you have to," he said. "By having that cash position, the moments when the markets are most fearful, we have found to be able to deploy that capital most efficiently."
With that in mind, he names the his top four favorite themes for 2020:
(1) Military technology
Retzler says companies in artificial intelligence, semiconductors, servers, and data processing will all benefit from the increase in spending on military tech in the years ahead.
"The continued modernization of our military is a strong driving force for high growth industries," he said. "What that means is the deployment of higher technology into the battlefield. And a lot of that is driven by communication, processing and results that are driven out of that processing for decision making."
(2) 5G wireless
The next generation of wireless technology, devices and equipment is also going to create a lot of opportunities in the small-cap space, according to Retzler.
"5G deployment has begun globally, and we expect to see it accelerate to domestically at some point in 2020," Retzler said. "Thereafter there's a substantial amount of infrastructure equipment that needs to be deployed.
"And along with that, there's going to be all of the devices that then will connect to that system. So new mobile phones, cars, the entire IoT."
(3) Streaming content
A lot of investors have poured their money into the streaming space in the years since Netflix made the jump from small-cap to mega-cap stock. Retzler says there are still some promising opportunities in the business, but rather than looking for streaming platforms, investors should focus on content and infrastructure.
"There are smaller cap companies out there that have substantial content libraries that continue to be monetized and we think still have room to go," he said. "You've seen acquisitions of content by larger media companies because there's only so much that's ever been produced."
(4) Healthcare
Healthcare stocks have lagged the rest of the market this year thanks in part to concerns about major reforms like Medicare for All proposals. But Retzler says the industry in general is growing faster than the US economy, and businesses in health monitoring are promising.
"We think those with the high technological moat should do well in either environment," he said. "Those that can provide better outcomes at lower costs should be able to outperform in that sector."