Why CTSIX’s Nelson Is Optimistic About the Recovery, Corporate Profitability and Small Caps

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In a turbulent period for the markets, Calamos has been hosting a Calamos CIO Conference Call series for investment professionals. Below are notes from a call Tuesday, April 21, with Brandon Nelson, CFA, Senior Portfolio Manager of the Calamos Timpani Small Cap Growth Fund (CTSIX). To listen to the call in its entirety, go to https://www.calamos.com/CIOsmallcap-4-21

For the March commentary, see this post.

One month after the depths of the equity market decline, Brandon Nelson expresses optimism about the prospects for the country’s health, corporate profitability and what he calls “exciting” small companies in the Calamos Timpani Small Cap Growth Fund (CTSIX) portfolio.

He’s encouraged, he said, that the virus metrics are dropping, the health care community is becoming better equipped to properly deal with the virus, and that potential treatments and vaccines are progressing. He described the monetary and fiscal stimulus as “shockingly robust.”

“These positive data points, combined with extremely oversold market conditions, have been the recipe for a powerful recent surge in the stock market,” he said.

“The good management teams are not just sitting on their hands, watching their businesses collapse. They are finding creative ways to reduce expenses and increase efficiencies in an attempt to minimize the profitability hit,” he said.

Profits Could Recover Faster

Nelson acknowledged the lack of consensus about the shape of the eventual economic recovery. But he believes profits could recover faster than expected—“even if the recovery takes longer to materialize or is less robust than expectations.”

To illustrate, Nelson offered this example:

Let’s say that a consumer company pre-virus was generating $10 million of revenue and 50 cents of profit per share. The virus hits and revenues collapse to $6 million, and profits go to zero. Now, fast-forward a few months into the recovery. Because of the expense reductions and improved efficiencies, coming out of the downturn, the company is generating 50 cents per share once again, but this time, with only $9 million of revenue. In such a case, the trajectory of the profit recovery is steeper than the trajectory of the revenue recovery.

“I think we are going to see a lot of this, and it will have meaningful, positive implications for the stock market, given that profitability is such a key valuation metric,” he said.