There is a strange dichotomy with small cap funds – the more successful they are, the more assets they gather, and the more assets they gather, the smaller their investable universe and the less likely they are to be successful in future
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At just over £100m, LF Miton US Smaller Companies is in something of a sweet spot. Nick Ford (pictured), the fund’s FE Alpha Manager, said: “One advantage that it has compared with some of the other IA North American Smaller Companies funds is that its size means it can get involved in less liquid situations.
“It is harder for some of the very big funds to do that because the trading volumes in a lot of these stocks can be quite low and it can take a long time to do.”
Hunting through the lower end of the market cap scale has allowed Ford and co-manager Hugh Grieves to unearth some companies that many UK investors may not have heard of yet – and probably never will, given their focus on issues that are unique to the US.
Here are three fast-growing US stocks showing that, while English is the official language of both Britons and Americans, they often seem to be speaking a completely different language.
ShotSpotter
“ShotSpotter has identified areas in cities where there are unusually high numbers of homicides or gun-related activities,” said Ford, “and it has lined these streets with sensors so they can quickly alert the police and the emergency services to where the gunfire is coming from.
“When the police get there they know exactly where to go to and can arrest culprits more quickly and more efficiently and the ambulances can get wounded people to hospital to save lives more quickly, so it’s kind of a win/win.”
ShotSpotter said that after Oakland Police Department began to use its technology in 2012, it saw a 71 per cent decrease in gunfire incidents per square mile over the next five years. Other forces typically report a reduction of 40 to 50 per cent in homicides from shootings.
Ford said that ShotSpotter still has the majority of the US left to roll its services out to, meaning its current sales represent a fraction of its potential market.
However, he admitted the company’s reliance on local government and police force spending is a potential risk.
“This is early stage, we’ll need to see them execute, we might be wrong,” he added.
“If we are wrong, it would be a case of overestimating the extent to which the police value the service. You can never be 100 per cent right.
“This is why small-cap investing is fascinating: you have to make a rational assessment on something and then make a judgment.”
Performance of stock since IPO
Source: Google Finance
ShotSpotter has a market cap of $490m.
Freshpet
Ford described Freshpet as “more of a fun one” than ShotSpotter.
“These guys are rolling out refrigerators in supermarkets across the US and are stocking them with freshly prepared pet food,” he said.
“That’s a huge opportunity. Pet ownership rates are going up very sharply in America, people are appreciating the emotional wellbeing of having companion animals more and more and they want to give them the best food.
“They don’t want to give them the tinned rubbish. People are realising there is a lot of bad stuff in the tins.”
A statement on the Freshpet website said: “We consider our dogs and cats to be part of the family. That’s why we say ‘Pet Parents’ instead of pet owners.
“We believe our four-legged family members deserve all the benefits from a fresher, more natural diet. That’s why we gently steam our meals at low temperatures. And that’s why you’ll find our pet food in the fridge – where real, fresh food belongs.”
Another statement said the food is “always made in the USA” and “has no ingredients from China”.
Performance of stock since IPO
Source: Google Finance
Freshpet has a market cap of $1.5bn.
Everbridge
Similar to Shotspotter in that it offers protection against “workplace violence, active shooters and terrorism” is Everbridge.
“Everbridge is basically a communications platform that companies subscribe to,” Ford explained. “When there is a terrorist event, the police, who have access to the platform, notify all the employees about where to go to get to safety or to take cover or what to do.
“It basically shoots out instant messages to any sort of platform you are on whether it is your phone or your PC or whatever.
Everbridge said it also protects against severe weather, IT and power outages, environmental discharges, critical equipment failures, medical emergencies and social media attacks.
It sent out more than 10 million messages to residents during Hurricane Sandy and was used extensively by City of Boston authorities during the 2013 marathon bombing.
Ford added: “This potentially could be a very large company because it may come to pass at some point whereby insurance companies say ‘look, we are not going to insure you unless you are on the Everbridge system so that employees can be notified in the event of an adverse event’.”
Everbridge has a market cap of £2.38bn.
Data from FE Analytics shows LF Miton US Smaller Companies has made 19.11 per cent since launch in March 2018 compared with gains of 10.97 per cent from its IA North American Smaller Companies sector.
Performance of fund vs sector since launch
Source: FE Analytics
It has ongoing charges of 0.94 per cent.