Time to Beat Apple

Small value stocks haven't been doing well. But money manager MILES LEWIS makes the case that at a time of turbulence on Wall Street, they are ready for a rebound.

- By William Baldwin

Tariffs. Inflation. Economic chaos.

Bring it on, says Miles Lewis, manager of a portfolio of quirky stocks that, he says, are better equipped than the average stock to weather a tumultuous time in the U.S. economy.

Recession? That should send shoppers for sporting goods out of high-class vendors to the downmarket chain he favors. Rising interest rates? A steeper yield curve would benefit the venerable savings bank in which Lewis has a stake. Economic uncertainty? That will make it hard for municipalities to sell bonds, so they will be patronizing a bond insurer he likes.

Lewis runs $1.5 billion, most of it in the Royce Small-Cap Total Return Fund. A story goes with each of the fund’s 60 stocks, but there’s also a big-picture bullish case. Small companies are more domestically oriented than the multinationals in the S&P 500. “They're more insulated from retaliatory tariffs and deglobalization,” Lewis says.

Another tailwind might come from the fact that stocks like the ones Lewis holds are overdue for a rebound. In the 16 years since the financial crisis, Wall Street’s winners have been big growth companies. The money management firm created 53 years ago by Charles Royce is in the opposite corner of the market.

The companies in Small-Cap Total Return average a market value a thousandfold smaller than that of Apple. They are cheap, too, trading at a collective 13 times trailing earnings, to 21 for the S&P (both calculations omit companies losing money). It would be better for Lewis if his stocks weren't quite so cheap. Like most of what's in the Royce lineup, his fund can, net of its 1.2% annual fee, boast of benchmark-beating returns since inception (for this fund, in 1993). But that’s not good enough. When investors compare the results not to an index of small value stocks but to the S&P 500 they feel they are missing out.