US Markets Loading… H M S
Premium
Kevin Rendino, the CEO of 180 Degree Capital, bets on mismanaged micro-cap stocks. Kevin Rendino, 180 Degree Capital This story is available exclusively to Insider subscribers. Become an Insider and start reading now. Veteran investor Kevin Rendino believes micro-cap stocks are set for a huge turnaround. Although stocks have rallied in 2023, he thinks there’s still too much pessimism about the economy. Here are five small companies that could have huge returns with a bit of good fortune. A 35-year market veteran who specializes in reversing the fortunes of beaten-down stocks is on a mission to do the same for his own fund.
Kevin Rendino, formerly of Merrill Lynch and BlackRock, is an activist investor focused on reviving small companies that might just be sleeping giants. His investment firm, 180 Degree Capital, could use a U-turn of its own this year — shares of its closed-end fund by the same name have fallen 45% in the last two years.
But cycles of booms and busts are to be expected for 180 Degree Capital since the fund only holds a handful of micro-cap stocks at a time. Those tiny companies are highly volatile compared to the large-cap firms that Rendino used to target, as they can easily double — or get cut in half.
Smaller stocks have lagged their larger peers for most of the past decade, but last March, Rendino was convinced that a turnaround was near. After his bull case didn’t materialize, the long-time investor told Insider that he was puzzled but not shaken in his convictions.
“We’re just going to stick to our knitting here and win,” Rendino said in a recent interview with Insider. “And if we’re not sort of the ‘flavor of the month,’ so be it. I don’t care. We have a niche; we stick to our niche. We’re really good at it.”
Rendino continued: “We’ve won. We’re not winning now. We’ll win again. So we’re just focused on what we focus on.”
Small caps look enticing if there’s no economic disasterMuch has changed in markets since March 2022, but Rendino’s thesis for small- and micro-caps hasn’t. He still believes the so-called “end-of-the-world” scenario that investors are pricing in for that group of stocks right now is completely unwarranted.
Small caps typically do best in economic expansions, Rendino noted, so it’s not shocking that they’ve struggled in the last 18 months as slowing economic growth led to recession fears. But what does surprise Rendino is how smaller stocks have continued to underperform in 2023.
The small-cap focused Russell 2000 Index and the Russell Microcap Index are down 25% and 30%, respectively, from their late 2021 peak, while the S&P 500 and Nasdaq Composite have fallen just 9% and 16% in that span. And so far this year, the large-cap-filled S&P 500 and Nasdaq are up about 13% and 29%, respectively, while the Russell indexes have barely budged.
Investors are avoiding smaller stocks as if a 2008-style recession is coming, Rendino said. The market veteran thinks such a scenario is far-fetched, but even if a severe downturn does strike, he noted that there wasn’t a big performance gap between large and small stocks 15 years ago.
“This is not a worse environment than ’08,” Rendino said. “I don’t care what anybody says — I know what that was. That was really ‘hide under the desk.’ This is not ‘hide under the desk.’ Most of the companies that we own are performing pretty well, to be honest.”
Rendino added: “I never thought we would go through a period like ’08 ever again. And I will tell you that this — actually, for what I do for a living — is worse than ’08.”
When market pundits start parroting the same point — whether it’s that inflation is transitory or a downturn is inevitable — Rendino said he’s learned that the opposite often happens. So while many see a contraction coming, the investor said that in his mind, a recession already occurred last year when GDP fell in back-to-back quarters. And since then, positive growth has resumed.
“I don’t see the excesses in the system like we saw in 2008, which would cause a recession,” Rendino said. He added: “Obviously, the housing market had a bubble. I don’t see that at all. I do see bubbles, but I see them in things that wouldn’t cause the economy to fall apart.”
Small cap valuations are compelling right now, Rendino said — especially if there’s no serious downturn. Investors are eager to pay up for growth since they’re worried about the economy, but if economic momentum builds, there could be a renaissance for value stocks and small caps.
In the meantime, Rendino said he’s positioning himself for future gains, whenever they come.
“We’re going to get paid for this,” Rendino said. “Now, we may not get paid today, tomorrow, next week, or next month. But I can promise you at some point, I’m going to be like, ‘Yeah, we were up 100% last year because the things that we were buying were trading at all-time lows, and the world didn’t end.'”
5 small stocks that can deliver huge returnsMicro-cap stocks may be volatile, but Rendino believes their cheap valuations mean they might not be such risky bets right now. Investors who wait for the group to regain steam may miss out.
“When investor sentiment is at its lowest, that’s the time to get greedy,” Rendino said. “And the opposite is the case. When everyone’s complacent, that’s the time to become conservative, as Warren Buffett would say.”
Below are five of Rendino’s favorite stocks right now along with the ticker, market capitalization, and thesis for each.
1. Comscore
Markets Insider Ticker: SCOR
Market cap: $81 million
Thesis: This media measurement company has great assets that yield incredibly valuable data, Rendino said. He thinks the stock is wildly undervalued and could soar 800% to $8 per share.
But Comscore’s stock has tanked in the past year despite significantly increasing its bottom line because the company is being bled dry by its management team, which Rendino said is paying itself about double what it should.
In response, Rendino is taking on them as an activist investor, saying in an April statement that executives are “intent on looting SCOR’s balance sheet for collective personal gains at the expense of the employees and common stockholders of SCOR.”
If Comscore improves its governance by cutting management’s pay and ensuring that preferred stockholders have the right priorities, the market veteran believes this stock will take off.
“If they can show that alignment, or at least show how their investment in this business or their place on the board is going to equate to running a much better business than the one they inherited, then the market will bid up the stock,” Rendino said.
2. Potbelly
Markets Insider Ticker: PBPB
Market cap: $232 million
Thesis: Since Rendino recommended this sandwich shop’s stock last March, it’s up 24% — and that’s after a 22% correction in the last two months. Potbelly shares also have more than tripled in the three years since he called out management for the stock’s “unacceptable” performance.
However, there’s still upside for this chain because its business has already been turned around, Rendino said. Average unit volume is up, as are same-store sales, and he praised Potbelly’s cost structure as sound. Its next step is franchising, which he said could quintuple its number of locations by the end of the decade. If that happens, Rendino thinks the stock might double.
3. Rayonier Advanced Materials
Markets Insider Ticker: RYAM
Market cap: $261M
Thesis: Rayonier is a chemical company based in Jacksonville, Florida, that’s best known for its cellulose-based products. Besides having a business that Rendino called “recession-resistant,” he noted that its EBITDA is over $200 million, which is close to its market capitalization.
The overhang on this stock is that Rayonier must refinance debt due in 2024 in the next week or so, but Rendino is confident that will get done soon. If he’s right, he said shares could rise 50%.
4. Synchronoss Technologies
Markets Insider Ticker: SNCR
Market cap: $91 million
Thesis: This cloud company could rise 19% in the blink of an eye since there’s already an offer to buy all outstanding shares for $1.15 each. Rendino said Synchronoss is worth at least that much as long as it keeps network giant Verizon as one of its top customers.
5. Intevac
Markets Insider Ticker: IVAC
Market cap: $95 million
Thesis: Intevac develops thin-film processors and announced a partnership last year with glass-maker Corning that could be a significant growth driver.
But the company gets little respect from Wall Street, as Rendino said it’s trading for less than the working capital on its balance sheet. The stock could double in the near future, in his view.
Read next
Receive a selection of our best stories daily based on your reading preferences.
Features Investing More…
Read next