Listen to Allen Steinkopf, Lead Portolio manager of the Mairs & Power Small Cap Fund, as he talks with Scott Howard, VP, Investor Relations Manager, on July 16, 2020 to provide an update on current economic and market conditions and their impact on the Mairs & Power Small Cap Fund.
The Mairs & Power Small Cap Fund experienced a tale of two quarters in the first half of 2020. Things looked bright at the beginning of the year, as they had for many years before. Then came the pandemic, and the market dropped about 35% by the end of March.
The federal government then brought to bear all the tools at its disposal. And in the second quarter, the market snapped back about 20%. Year-to-date, small caps are down about 15%. But first-quarter fears of a complete economic implosion have dissipated, and the market appears to recognize that.
Sector Overview and Performance
The Health Care sector was the Fund’s bright spot. Companies that have notably done well year-to-date include:
- Catalent, which makes capsules and other pharmaceutical delivery technologies. Its base business continues to do well. It also is partnering on 45% of the vaccines and other kinds of COVID-19 treatments under development.
- Inspire Medical Systems. This is a newer company that makes products to treat sleep apnea. It was affected somewhat by the first-quarter downturn, but overall, it has been on an upward trajectory.
By contrast, the Financial sector was a notably poor performer. With some sectors of the economy almost completely shut down, credit problems are inevitable. Until there is a better sense of what those credit losses will be, bank stocks will continue to be about as cheap as we’ve ever seen them. But we believe that the banking companies we hold are strong enough to make it through, for two reasons:
- The government stimulus and the help given to smaller businesses.
- The reforms put in place after the last recession. Banks have been much more diligent in their underwriting and in maintaining their capital reserves.
One general note: We routinely monitor the balance sheets of all the companies we hold. We rarely invest in companies with debt levels higher than two times EBITDA. Most of our companies are cash positive, with not a great deal of debt.
The Federal Reserve and Congress have shown a willingness to do whatever it takes to keep the economy stable. We anticipate another stimulus package to address unemployment, for instance.
Still, the crystal ball is cloudy. When states and cities began to open up again, it turned out that too many people weren’t willing to take precautions. Now many places have had to roll back, or are considering doing so. That’s likely to impact the economy in the third quarter.
That’s unfortunate, because when restrictions were loosened in May and June, unemployment declined significantly. This suggests that if we can get the novel coronavirus under control, the economy would snap back very quickly. And based on the many promising reports we’ve seen, we are optimistic that there will be vaccine or some other kind of effective treatment by year’s end, or the first quarter of 2021 at the latest.
Top 10 Fund Holdings (subject to change)
The statements and opinions expressed are those of the speakers and are as of the date of this call. All information is historical and not indicative of future results and subject to change.
EBITDA (Earnings Before Interest, Tax, Depreciation, Amortization) is a metric used to evaluate a company’s operating performance.