Chris Retzler of Needham Asset Management joined the Investing with IBD podcast this week to discuss action in small-cap stocks and how the chip shortage is affecting many areas of the market. Plus, we take a look at a few trade ideas of companies in various phases of development in the small cap to midcap pipeline: Photronics (PLAB), Aspen Aerogels (ASPN) and II-VI (IIVI).
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Dow Jones Hits New High; Nasdaq And Small-Cap Stocks Lag
The Dow Jones Industrial Average hit new highs in the stock market today while the Nasdaq continued to struggle. Small-cap stocks also lagged in midday trading action.
DJIA reversed higher to a 0.5% gain while the S&P 500 rallied to climb into positive territory. However, the Nasdaq saw an earlier rally fade to a slight 0.2% loss. Tech stocks continued to get hit this week, causing the index to underperform.
Small-cap stocks also lagged behind the overall market. The iShares Russell 2000 ETF (IWM) fell nearly a percentage point. That fund has been consolidating over the last month after making a 12% climb since the beginning of the year.
Retzler, who manages the Needham Small Cap Growth Retail (NESGX) mutual fund, has seen bullish action in small-cap stocks over the last few years. NESGX has more than doubled since bouncing off a March 2020 low of 10.69 at the bottom of the coronavirus stock crash.
Small-Cap Stocks Oscillate
“The last few years have certainly been good for small caps,” Retzler said. He added that while there’s been growth in small cap stocks, it’s been hard for the sector to hold extended gains. That’s where being flexible on when to take profits and maintaining patience plays into his strategy.
“I think that for even a long-term investor, there’s nothing wrong with taking some profits at times,” Retzler said. “We also then redeploy that capital at times when you hit a rough patch, or a tough two quarters where management is just going through some growing pains.”
Maintain A Consistent Investing Style
Retzler explained the importance of maintaining a consistent investing approach. He explained that patience and the ability to hold a stock is one of the main keys to building gains in small-cap stocks.
“You do need to have patience in some of these and things don’t always just occur every quarter,” Retzler said of small cap stocks. “We continue to stick to what we know best. We really don’t try to have any style drift.”
He added that one of the most important aspects to his approach is completing due diligence on company leadership.
“Management and strength of what is the product or service that they’re providing are really the forefront of where we go and spend our time and then make investments,” Retzler said.
Listen to the full podcast to hear Retlzer explain his approach to investing in small-cap stocks.
Midcap And Small Cap Stocks To Watch
Finally, Retzler discussed a few midcap and small-cap stocks included in the Needham Small Cap Growth Fund portfolio: Photronics stock, Aspen Aerogels stock, and IIVI stock.
Retzler says that Photonics is a key supplier in the semiconductor industry. The company provides photomask technology that is needed to produce chips.
PLAB stock is currently trying to bounce back above its 21-day line after a breakout from a cup base. Shares have drifted slightly lower since clearing a 13.57 buy point, but have seen tightening action over the last several weeks. While PLAB stock’s trading range has been volatile, Retzler thinks the company’s position in the semiconductor space bodes well for consistent future gains.
“For the first time in decades, they have some pricing power,” Retzler said. He added that increased product demand and the completion of a key supply factory also bodes well for PLAB stock’s growth.
“They’ve turned the corner to be a cash generator from a cash deployer investor,” he said. “We think that they’re now on a pretty good runway for the next couple years.”
Aspen Aerogels Stock
ASPN stock is another name in Needham’s small-cap stocks fund. The chemical supplier manufactures aerogel products needed for battery production. Shares climbed 83% out of a consolidation with a 14.73 buy point last November before hitting their peak on Feb. 10.
Since then, ASPN stock has gradually descended to its 10-week line. Current price action is tightening as shares look to climb back above that key resistance level to reverse out of a three-month downtrend.
Retzler adds that ASPN stock’s investment in a business segment to develop technology for electric-car batteries will drive shares to new highs.
“The other business that they’ve been developing, which I really think is the high growth part of the business, is their thermal runway technology that can be used in electric cars and electric batteries,” Retzler said. “We think that it’s really great upside that they’re looking at going forward.”
IIVI stock’s recent $6.3 billion takeover deal for Coherent (COHR) will give the laser tech firm an opportunity to accelerate growth, according to Retzler. “They’ve been expanding their businesses beyond just their specialty materials that they’ve always been known for within the laser industries,” Retzler said. “We think that there’ll be some substantial expansion as they move from more of a midcap to a large-cap company.”
IIVI stock recently broke below its 40-week line. Shares went on a monster run in late 2020 after breaking out of a cup-with-handle base at a 48.10 buy point. IIVI stock climbed 108% to hit a peak of 100.44 on Feb. 12 before reversing lower.
Those that bought at the 48.10 entry still have plenty of cushion to see how IIVI stock acts at the 40-week line, but a break of more than 8% below that level by the end of the week would be considered a strong sell signal, according to CAN SLIM investing rules. Right now IIVI is more than 17% below that key resistance level.
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