Lauren Romeo: Looking across our Small-Cap Premier Quality Strategy, one pocket of companies whose stocks have lagged in 2024 are select big-ticket consumer durable names where spending is discretionary, such as RVs, recreational boats, and residential pools. After many of these companies benefited from a significant boost in demand during the pandemic, sales have slumped due to the post-pandemic reallocation of discretionary spending by consumers from products to services (e.g., travel and entertainment), along with the persistence of higher interest rates stemming back to 2022 when the Fed was working to reduce inflation.

In response, both consumer durable products manufacturers and their dealers have been reducing inventory over the past 18 months and implementing cost reductions. Based on our conversations with the management teams of the affected companies we own, as well as related players across their industry supply chains, demand appears to have hit a bottom. While many cross-currents remain, the removal of the U.S. election overhang and several pro-growth economic policies espoused by the incoming Trump administration, such as deregulation, reshoring, and extending or expanding individual and corporate tax cut, may provide the required boost to consumer confidence that, assuming inflation is contained, could be the catalysts that reignite big-ticket consumer spending. Additionally, products such as RVs and powerboats that were sold during the pandemic are nearing the five-year ownership mark, which is often when owners seek to replace or upgrade to a new unit. Moreover, the size of the potential upgrade fleet is larger than it has been historically because the pandemic drove a higher-than-normal influx of first-time buyers who were new to the activity.

We think companies that are both dominant suppliers to the major brands and have significant potential earnings leverage from improved factory utilization and/or permanent cost actions taken during the downturn appear poised to benefit if end market demand revives during 2025. For example, LCI Industries (NYSE: LCII) makes key engineered parts and components. It has a 60% share with RV manufacturers, 45% with marine, and ample market space to increase content per unit at a 3-5% annual pace while also growing in aftermarket and international. Another relevant example is Brunswick Corporation (NYSE: BC), a leading provider of recreational marine products, including outboard engines where its Mercury Marine brand holds a 50% share, onboard electronics (e.g., fish finders, digital navigation systems), and a portfolio of boats, such as the Boston Whaler and SeaRay brands. While its high margin, less cyclical, after market parts and accessories business has enabled the company to remain solidly profitable during the downturn, Brunswick’s true earnings power should prove to move significantly higher as spending on its more discretionary products recovers. Similarly, Pool Corporation, the largest worldwide distributor of swimming pool-related products, looks positioned for accelerated earnings growth if big-ticket spending revives. While most of its revenue is derived from recurring maintenance and repair items, and approximately 40% is tied to new pool construction or replacement & and remodel, which are more discretionary purchasing decisions.

Miles Lewis: In our Small-Cap Quality Value Strategy, we believe there could be a pick-up in spending among the middle and lower income consumers in the U.S., two groups that have been hit the hardest by higher inflation and interest rates in recent years. We think 2025 could mark a shift in spending for the bottom half of the population. While the impacts of inflation have been well documented, we think certain areas matter more than others, and each is continuing to show improvement: gas prices have come down to 2021 levels—well below the peaks of 2022 and sustained high levels in 2023—and are expected to continue when the new administration takes office. Similarly, the rate of increase in food prices has come down considerably, up only 2.4% per the most recent data, compared to a peak of more than 11% in 2022. We hear from our food packaging companies that their customers (that is, consumer packaged food companies) are focused on driving volumes via lower pricing after relying on price to drive revenues for several years—which supports continued improvements on price for middle and lower income consumers.

Housing costs also continue to come down and are likely to continue doing so given the lagged effects of government data versus real time indicators such as Zillow. Against this improving backdrop are continued gains in real income for U.S. consumers that have picked up steam in recent months against a favorable backdrop of low unemployment, lower interest rates, improving consumer and small business confidence, and stable credit card delinquencies, which were down slightly in 3Q24 versus 2Q24. Our team owns several stocks that would benefit from this shift, though given the idiosyncratic nature of these companies, we don’t see it as a requirement. Academy Sports & Outdoors (Nasdaq: ASO) is one example. Academy is the nation’s second largest sporting goods retailer and as a value leader, it skews more closely to middle and lower income buyers. Unsurprisingly, then, its core business has been under pressure for two plus years, largely due to the pressure on its core customers. If the encouraging economic trends continue, they will provide a strong tailwind to an already improving set of fundamentals. With a valuation of only 8.0x earnings, which we feel are already depressed, the risk/reward appears to be heavily in our favor with little, if any, good news for the U.S. consumer priced into the stock today.

Brendan Hartman: One area that we like in our Small-Cap Opportunistic Value Strategy is natural gas. But this is not a commodity price play, it’s a secular cycle play: power demand is accelerating in the U.S. after two decades of less than 1% annualized growth for natural gas. Based on official forecasts from NERC (the North American Electric Reliability Corporation), FERC (the Federal Energy Regulatory Commission), and state level forecasters, demand for peak power is expected to grow 3% a year over the next five years. Driving this rapid rise in demand are concurrent significant investments in data centers needed for the ongoing evolution in AI, advanced manufacturing for domestic semiconductor production, and the electrification needed to generate increased levels of energy.

While 3% annualized demand growth might sound small, it means a significant need for new energy generation and transmission capacity. Currently there is a scramble to find faster sources of power generation because it can take up to four years to bring new generation online. Natural gas has therefore emerged as a favored way to meet the power demand, driven by abundant U.S. natural gas reserves and the availability of portable natural gas-based generators and small gas turbines, which are much faster to commission compared to other forms of power generation. Large capacity stationary gas turbines, nuclear reactors, and solar plants, despite their favorable economics, are hamstrung by permitting delays and administrative bottlenecks around grid connectivity.

We have several investments in our portfolio that are positioned to take advantage of the rise in natural gas based distributed power generation and the consequent demand for natural gas as a commodity in 2025 and beyond. For example, Solaris Energy Infrastructure (NYSE: SEI) and ProPetro Holding (NYSE: PUMP) are seeing growing demand for their natural gas-based, distributed/portable power generation offerings in the data center and industrial end markets. Our portfolio also has significant exposure to the underlying commodity through gas-rich exploration and production (E&P) companies such as Comstock Resources (NYSE: CRK), Sandridge Energy (NYSE: SD), and Vermilion Energy (NYSE: VET).

Francis Gannon: One interesting consequence of the U.S. equity market’s strength in 2024, and particularly for small-caps in the second half of the year, has been a relative dearth of volatility. This calm has been even more pronounced with large-cap stocks, as measured by the VIX—the CBOE Volatility Index, which tracks the market’s expectations for the relative strength of near-term price changes in the S&P 500 Index (“SPX”). Often referred to as “the fear index,” the VIX is derived from the prices of SPX options with near-term expiration dates and generates a 30-day forward projection of volatility, a gauge of the speed with which share prices change. With the exception of a significant, though short-lived, spike in early August, large-cap stocks have enjoyed an uncommonly quiet year on 2024, just as they did in 2023.

Within small-cap, we also look at the percentage of trading days with moves of 1% or more in the Russell 2000 Index. The small-cap index’s average over the last 25 years has been 42% of days with such moves. Year-to-date through 12/11/24, the Russell had 41%, or 98 out of 239 days with moves of 1% or more, making it a marginally less volatile year for small-caps. Our more than five decades of small-cap investing tell us that this state of affairs, while more than welcome, will end regardless of asset class. We not only expect more historically typical levels of volatility in 2025 but also think it’s important to remind our investors that we do not look at increased volatility through the conventional lens of fear but through the longer-range vista of opportunity. As risk-averse and price sensitive long-term investors, we always work to use short-term volatility to our long-term advantage.

In addition, history shows that periods of heightened volatility were followed by higher-than-average small-cap returns. We looked at subsequent average annualized returns for the Russell 2000 and the large-cap Russell 1000 following periods when the VIX was elevated, using monthly rolling return ranges for the volatility index. We found that the percentage of periods when the Russell 2000 had higher average annualized 3-year returns than the Russell 1000 were at their highest following periods of heightened volatility. Coupled with small-cap’s impressive absolute and relative strength in the second half of 2025, we are cautiously bullish as we look toward 2025.

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