Portfolio manager Jeff Mo believes investors should take a closer look at U.S. mid-capitalization stocks, in particular what he calls “American Dream” companies, which aren’t household names yet but are set on becoming large-cap companies in the near future.
His firm, Mawer Investment Management Ltd., has been investing in U.S. mid-capitalization stocks within its U.S. and global equity strategies for years, but decided recently to focus on this segment of the market. The firm recently launched the Mawer U.S. Mid Cap Equity Fund to give investors concentrated exposure to some of these names.
“We felt that there were many interesting companies in the U.S. But we had never offered a dedicated product for our clients to invest in these companies,” says Mr. Mo, who manages about $3.5-billion in assets including the Mawer New Canada Fund, which has been closed to new investors since 2005.
The New Canada Fund has a management expense ratio of 1.35 per cent and total return of 33 per cent over the past year, after fees, as of Sept. 29, according to Morningstar.
The U.S. Mid Cap Equity Fund was launched on Sept. 27 and has an MER of 1.45 per cent. Below are three of Mr. Mo’s picks from the new U.S. mid-cap fund:
Charles River Laboratories International Inc. (CRL-N)
The company, founded in 1947, is an early-stage contract research company that provides drug discovery, non-clinical development, and safety testing services worldwide.
“Because pharmaceutical research is highly regulated, you need to have a very deep expertise and experience in this industry and Charles River has that,” he says. “They do all of the services a biotech company would need to take a drug to Phase 1 of a clinical trial.”
For instance, he says Charles River has worked on about 80 per cent of the drugs approved by the U.S. Federal Drug Administration over the past three years.
He says the company dominates the early-stage biotech space. However, that dominance is a potential risk for the stock should biotech companies receive less funding in a market downturn. “But so far they’ve done really well,” Mr. Mo says.
The stock is up 70.8 per cent over the past year.
FTI Consulting Inc. (FCN-N)
Washington-based FTI is the world’s largest provider of specialty consulting in areas such as business restructuring and bankruptcy, anti-corruption and anti-money-laundering investigations, and cybersecurity and forensic accounting.
“FTI has some of the strongest brands and some of the foremost experts in these areas,” Mr. Mo says.
He says the company is hired by law firms and Fortune 500 companies: “For example, many firms that have a corporate investigation going on, such as a data breach, or are being sued by the Department of Justice for anti-competitive behaviour ... would hire FTI to handle their case.”
He credits chief executive officer Steven Gunby for improving the culture and communications at the company and bringing in top talent since he took the job in 2014.
“This is a company with a very strong pedigree and strong competitive advantages,” Mr. Mo says. Since Mr. Gunby has joined, “they also now have a CEO that knows how to help the company increase its margins, diversify its business and grow organically in new areas.”
A risk for the company is losing top talent, but Mr. Mo says that has been less of an issue since Mr. Gunby took over. A drop in bankruptcy filings could also affect FTI’s bottom line, given they make up a large chunk of its business.
The stock is up 25.1 per cent over the past year.
XPEL Inc. (XPEL-Q)
San Antonio, Tex.-based XPEL Inc. is among the largest providers of protective films and coatings for automobiles. The protective plastic film is offered by dealers to new car buyers to protect the paint from dents and scratches.
Mr. Mo says the company’s competitive advantage is sophisticated software that provides custom cutting for almost every car model. “You need to make a film with adhesive on one side and cut it so it matches the contours of each vehicle. That’s a difficult thing to do, and the company’s software is very good at doing that,” he says.
Mr. Mo says the company is growing by about 30 per cent each year as the number of people who buy the protective coating increases. He estimates less than 10 per cent of new cars sold in North America today have the film, and the percentage is even lower elsewhere. “And so the opportunity for XPEL is to continue to knock on the doors of car dealerships around the world, and to introduce them to this product.”
A slowdown in new vehicle sales is a risk for the company, Mr. Mo says. Also, the stock price has had a run-up in the past year, increasing by almost 190 per cent.
“Investors have priced in some growth,” he says. Still, over the long term, “it’s a technology penetration game that we believe is in its early innings.”
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