US small caps to invest in
A professional investor tells us what US small caps he’d consider. This week: Jon Brachle, co-portfolio manager, JPMorgan US Smaller Companies Investment Trust

The Russell 2000 is known as the world’s “biggest small index”. It offers investors the chance to invest in the heart of America. These small- and mid-cap stocks are diverse and offer more domestic focus than the multinational giants at the top of the S&P 500. In addition to providing important portfolio diversification, smaller companies typically outperform in the long run, owing to their greater scope for long-term growth.
Excluding the “Magnificent Seven” from the S&P 500’s return in 2023, it reveals that the remaining 493 stocks actually lagged the Russell 2000. Small caps have recently traded on historically wider discounts to large caps. However, 37% of the Russell 2000 index is unprofitable, and small caps have an average leverage ratio of 4.3 times. Disparities between market averages and individual stocks require active management to identify the winners and losers. Our investment process focuses on three key attributes: quality businesses, quality management and attractive valuations. Here are three firms that meet these criteria.
US small cap safe bets
MSA Safety (NYSE: MSA) is the global leader in the development, manufacturing and supply of safety products that protect people and facilities. MSA’s core products include self-contained breathing apparatus and other protective gear for firefighters; gas and flame detection systems used in a variety of industrial settings; and industrial head protection and fall-prevention equipment. Given the mission-critical and non-discretionary nature of safety products, MSA tends to experience less cyclicality than other industrial companies, with regular replacement of safety equipment often mandated by law. The company makes a healthy profit and requires limited capital investment, driving strong and durable cash flows.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Encompass Health (NYSE: EHC) is the largest operator of patient rehabilitation facilities in the US. As rehabilitation services are needs-based, patient volumes tend to be non-cyclical, while also benefiting from demographic trends as the US population ages. The combination of steady revenue growth, attractive profit margins and strong cash flows is a testament to the quality of the business, and we think Encompass’s strong management team and attractive valuation make the stock a promising investment.
MACOM Technology Solutions (Nasdaq: MTSI) designs and manufactures semiconductor technologies for optical, wireless and satellite networks. Macom has diversified exposure to applications in the industrial, telecommunications and data-centre markets, with the company’s multi-decade record and more than 600 patents underpinning a strong competitive position.
US small caps powered by artificial intelligence
Macom generates very attractive profit margins and strong cash flows, and is run by a management team with a history of creating value for shareholders. Recently, shares have benefited from the group’s exposure to optical components for artificial intelligence (AI) applications with data centres, which has driven a strong rally in shares. While we’ve taken some profits on recent strength, Macom remains a high-conviction position for the long term.
The US economy remains strong, with falling inflation and rising real wages offsetting dwindling savings and tighter credit conditions. We think moderate consumption growth should carry the US economy to a soft landing. We remain positive about small caps thanks to compelling valuations and strong fundamentals. Robust earnings growth, combined with low valuations, could drive small caps to regain the momentum of 2000-2011, when they outperformed. Investors remain underexposed to small caps. However, as their fundamental merits are rediscovered, we anticipate a return to the sector.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
-
How to pay in a cheque
Receiving or writing a cheque has become much less common in recent years as instant bank transfers have grown in popularity. Amid widespread bank branch closures, we explain what to do if you get a cheque, and how you can pay one into your bank account.
-
Crypto assets of seven million UK investors at risk – how to keep yours safe
Cryptocurrency wallet rules make it hard to track down assets after someone has died, even if they leave a will saying who they would like to inherit them
-
8 of the best properties for sale with kitchen gardens
The best properties for sale with kitchen gardens – from a 17th-century timber-framed hall house in Norfolk, to an Arts & Crafts house in West Sussex designed by Charles Voysey with a garden by Gertrude Jekyll
-
Why investors can no longer trust traditional statistical indicators
Opinion The statistical indicators and data investors have relied on for decades are no longer fit for purpose. It's time to move on, says Helen Thomas
-
Investors rediscover the virtue of value investing over growth
Growth investing, betting on rapidly expanding companies, has proved successful since 2008. But now the other main investment style seems to be coming back into fashion.
-
8 of the best properties for sale with shooting estates
The best properties for sale with shooting estates – from an estate in a designated Dark Sky area in Ayrshire, Scotland, to a hunting estate in Tuscany with a wild boar, mouflon, deer and hare shoot
-
The most likely outcome of the AI boom is a big fall
Opinion Like the dotcom boom of the late 1990s, AI is not paying off – despite huge investments being made in the hope of creating AI-based wealth
-
What we can learn from Britain’s "Dashing Dozen" stocks
Stocks that consistently outperform the market are clearly doing something right. What can we learn from the UK's top performers and which ones are still buys?
-
The rise of Robin Zeng: China’s billionaire battery king
Robin Zeng, a pioneer in EV batteries, is vying with Li Ka-shing for the title of Hong Kong’s richest person. He is typical of a new kind of tycoon in China
-
Europe’s forgotten equities offer value, growth and strong cash flows
Opinion Jonathon Regis, co-portfolio manager, Developed Markets UCITS Strategy, Lansdowne Partners, highlights forgotten equities he'd put his money in