Van Berkom: The big return of US small caps

 

Mathieu Sirois: Our investment philosophy can be summed up in a few words: We aim to invest in the best companies we can identify in the market. These companies are characterised by superior financial ratios: strong returns on capital and equity, and the ability to generate free cash flow. We look for a combination of consistent financial results and strong, self-financing balance sheets that lead to positive valuations. We only invest in companies that we believe are mispriced by the market. Our quality standards are high. We consider only the top 40 to 45 companies that we believe can deliver superior returns to our investors. We are bottom-up investors, focused on selecting stocks with the potential to double in value within five years.

What characterises your investment strategy?

We focus on the US mid-cap market, which consists of around 3,000 companies below our market capitalisation threshold. Only about ten percent of these companies make it onto our shortlist. Through in-depth analysis, we develop a comprehensive knowledge of each potential investment candidate. Our research process is based on more than 35 years of experience: we review, analyse, and evaluate all aspects of a company's business - from financial targets, strategy, and governance to environmental and social issues and competitive advantages.
We assess the size of the target addressable market and its growth drivers. We build a complete financial model with conservative estimates for the next ten years to generate projected earnings and cash flow assumptions. From this data, we derive a discounted cash flow valuation, which gives us a good estimate of the business’s intrinsic value. Our process also includes extensive discussions with the company's management, competitors, suppliers, and customers. We visit the company headquarters and operations and meet with the CEO, CFO, and other members of the management team. We believe it is worth the effort and that we gain a deeper understanding than other investors, which ultimately translates into long-term returns for our clients.

How do you generate consistent, predictable returns over changing economic cycles?

The entire investment universe comprises a large number of companies, many of which will not survive the next recession. Their business models are not strong enough, nor do they have solid balance sheets, skilled management teams or sufficient competitive advantages. With passive index investing, investors end up with such inferior companies in their portfolios. In contrast, our research process enables us to identify companies that have a strong and consistent track record of outperformance across multiple economic cycles. We select companies with robust business models and substantial protection from both existing and potential new competitors. For example, companies with high recurring revenues provide stability in their financial results over several cycles. Our strategy track record illustrates this consistent outperformance.

What role does the experience of your investment management team play in achieving outperformance?

The expertise of our team gives our strategy a significant competitive advantage. Long-term success requires a highly skilled team. Our investment team comprises five US small-cap experts who focus exclusively on this strategy. In addition, we have worked together as a team for over a decade. All team members are also shareholders in the firm.  Over time, we have also built deep knowledge of the market. The US small business market is unique, encompassing a large number of companies across various sectors and industries. This market segment requires specialised expertise, focused attention, and extensive knowledge.

What do you think sets you apart from your competitors?  

Our differentiation stems from three key aspects: First, the depth of our knowledge of the companies within our investment universe. We conduct thorough, in-depth analysis, allowing us to understand potential investments better than other investors. 
Second, our ability to spot mispricings. We invest in companies with the potential to double in value over the next five years. The third key aspect that sets us apart from our competitors is the strong corporate culture that we have cultivated at Van Berkom over the past 34 years. This culture brings people together and enables successful teamwork. As an independent, owner-managed firm, we have 14 partners on our team, all of whom play key roles - ranging from senior analysts and portfolio managers to executives. This ownership structure strongly aligns with our clients' interests and helps attract and retain top talent. Our staff really appreciate the working environment at Van Berkom.

What opportunities do you currently see in the market?

The current environment for the US small-cap market is excellent. For several years, small-cap stocks have underperformed large-cap stocks, particularly due to the outperformance of the Magnificent Seven and other mega-cap companies.. After years of underperformance, small US companies are now trading at prices that are close to 25-year lows relative to large caps. They are heavily undervalued and significantly cheaper than large companies. Inflation and therefore interest rates are starting to fall in the US, which has historically been very favourable for small companies. We believe the broader US small cap market looks extremely promising. Our team is actively exploring various positions and has recently made some new investments. We see many opportunities particularly in the services, industrials, healthcare and technology sectors, to name just a few. We currently have a very attractive pipeline of high-quality investment opportunities.

^{Note: This interview was produced in cooperation with Citywire and first appeared on citywire.com on 14 May 2025.}