Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 540

It's time small and mid-caps play catchup

  •   Qiao Ma
  •   20 December 2023
  • 2
  •      
  •   

2023 had been a strong year for the share performances of large technology companies. The Magnificent Seven tech stocks - Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), Nvidia (NVDA), Meta Platforms (META) and Tesla (TSLA) drove the bulk of market returns for the S&P 500.

Looking forward to 2024, we see many opportunities for smaller, less discovered companies. At Munro, we believe that stock returns follow a company’s earnings trajectory over a long time horizon, and we search all over the world for sustainable earnings growth. We are now observing earnings growth re-acceleration in many high-quality small companies.

Fortuitously, these companies are also ‘on sale’ – in our opinion these companies are cheap both relative to their own historical average valuation and their larger peers.

Why Generative Artificial Intelligence will start to benefit smaller companies too

Generative AI is a revolutionary tool, and so far, it mostly benefits the largest companies. The simple reason is cost – it takes over US$1 billion to train a large language model, so very few companies can afford it. However, 2024 is when these models are finishing the initial ‘training’ phase and entering the ‘inferencing’ realm, which is another way of saying now the world will try to generate real use cases from these staggeringly intelligent models.

Few companies outside of the Magnificent Seven can enjoy their fruits during the model training phase. During inferencing, however, anyone can benefit from them. This is an Appstore moment for Gen AI, and we expect to see a sharp increase in the number of smart, entrepreneurial companies racing to incorporate AI more deeply into their products and services.

Pinterest

An example of the kind of company we like is ‘visual discovery engine’ Pinterest (PINS). It had been labelled as a ‘boring’ legacy company, but we have observed how they have reinvented themselves into something much more exciting.

They brought in a stellar management team from Google and transformed Pinterest from a website for browsing pretty pictures to an incredibly shoppable interface on both the mobile app and their webpage. We are seeing many positive early results – user growth has re-accelerated, revenues are growing strongly again, and margins have expanded substantially. The stock jumped 20% on the recent positive earnings announcement, and we think this is just the start.

Area of Interest - Consumer

Activewear and outdoor living sportswear brands are a subsector of broader consumption which is becoming more of a focus for us. In our all-cap funds, we like companies like Lululemon, and in the small and mid-cap funds, we currently own On Running (ONON).

On Running

On Running started up 13 years ago in the Swiss Alps by a retired athlete who wanted to create a running shoe with a new feel. It is a small, specialised brand pulling ahead of the pack. It is also not as impacted by the range of macro factors hitting the market as it has a very specific set of devoted target customers to which it can sell a differentiated product.

We were able to add the company to our portfolio at, what we consider to be, a very attractive entry point, potentially its lowest valuation since the initial public offering (IPO), because at the time, the share price was being impacted by overall market macro concerns around consumer stocks.

It was encouraging to see that reported earnings for the financial year far exceeded expectations. The outlook for On Running is also looking very positive with a slew of innovative products in the pipeline.

 

Qiao Ma is a Partner and Small-Mid-Cap Lead Portfolio Manager for Munro Partners, a specialist investment manager partner of GSFM Funds Management. GSFM is a sponsor of Firstlinks. The information contained herein reflects the views of Munro Partners as at the date of publishing and is provided for informational purposes only. It should not be considered investment advice or a recommendation of any particular security.

For more articles and papers from GSFM and partners, click here.

 

  •   20 December 2023
  • 2
  •      
  •   

RELATED ARTICLES

Reports of tech's death are greatly exaggerated

Is the iPhone nearing its Blackberry moment?

Global consumer and corporate resilience surprises everyone

banner

Most viewed in recent weeks

The growing debt burden of retiring Australians

More Australians are retiring with larger mortgages and less super. This paper explores how unlocking housing wealth can help ease the nation’s growing retirement cashflow crunch.

Warren Buffett's final lesson

I’ve long seen Buffett as a flawed genius: a great investor though a man with shortcomings. With his final letter to Berkshire shareholders, I reflect on how my views of Buffett have changed and the legacy he leaves.

LICs vs ETFs – which perform best?

With investor sentiment shifting and ETFs surging ahead, we pit Australia’s biggest LICs against their ETF rivals to see which delivers better returns over the short and long term. The results are revealing.

13 ways to save money on your tax - legally

Thoughtful tax planning is a cornerstone of successful investing. This highlights 13 legal ways that you can reduce tax, preserve capital, and enhance long-term wealth across super, property, and shares.

The housing market is heading into choppy waters

With rates on hold and housing demand strong, lenders are pushing boundaries. As risky products return, borrowers should be cautious and not let clever marketing cloud their judgment.

Why it’s time to ditch the retirement journey

Retirement isn’t a clean financial arc. Income shocks, health costs and family pressures hit at random, exposing the limits of age-based planning and the myth of a predictable “retirement journey".

Latest Updates

Interviews

AFIC on the speculative ASX boom, opportunities, and LIC discounts

In an interview with Firstlinks, CEO Mark Freeman discusses how speculative ASX stocks have crushed blue chips this year, companies he likes now, and why he’s confident AFIC’s NTA discount will close.

Investment strategies

Solving the Australian equities conundrum

The ASX's performance this year has again highlighted a persistent riddle facing investors – how to approach an index reliant on a few sectors and handful of stocks. Here are some ideas on how to build a durable portfolio.

Retirement

Regulators warn super funds to lift retirement focus

Despite three years under the retirement income covenant, regulators warn a growing gap between leading and lagging super funds, driven by poor member insights and patchy outcomes measurement.

Shares

Australian equities: a tale of two markets

The ASX seems a market split in two: between the haves and have nots; or those with growth and momentum and those without. In this environment, opportunity favours those willing to look beyond the obvious.

Investment strategies

Dotcom on steroids Part II

OpenAI’s business model isn't sustainable in the long run. If markets catch on, the company could face higher borrowing costs, or worse, and that would have major spillover effects.

Investment strategies

AI’s debt binge draws European telco parallels

‘Hyperscalers’ including Google, Meta and Microsoft are fuelling an unprecedented surge in equity and debt issuance to bankroll massive AI-driven capital expenditure. History shows this isn't without risk.

Investment strategies

Leveraged single stock ETFs don't work as advertised

Leveraged ETFs seek to deliver some multiple of an underlying index or reference asset’s return over a day. Yet, they aren’t even delivering the target return on an average day as they’re meant to do.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.