Episode summary
You Own the Mag Seven. Small Caps Are Building What AI Needs. Is the Market About to Notice?
Excess Returns
· · 1 hr 6 min · Hosts: Jack Forehand, Justin Carbonneau, Matt Zeigler · Guests: Tom Maher
Summary
Tom Maher argues that small caps are getting more interesting again because earnings momentum has improved and the AI buildout is spilling beyond mega-cap technology into industrials, infrastructure, and other domestic businesses. He says the market is still trying to sort out whether AI spending is peaking or merely broadening, which is creating sharp day-to-day swings in both stocks and valuation multiples.
His case for small and midcaps rests on three things: better earnings growth, a less extreme concentration in giant stocks, and a domestic growth story tied to U.S. construction, reshoring, and industrial activity. He also notes that the passive flow into large-cap benchmarks has left many smaller companies underowned, which can create opportunity when fundamentals improve.
At the same time, he is selective. Maher emphasizes quality, self-funding business models, and valuation discipline, especially because higher rates make financing harder and can expose weaker companies. He says active management matters more in small caps because the index includes many unprofitable businesses, sector mixes are very different from the S&P 500, and stock outcomes are increasingly shaped by whether a company is actually improving rather than just being cheap.
Key takeaways
- Maher says small-cap earnings growth has accelerated enough that the market may need to reassess its long-standing preference for mega-caps.
- He thinks AI spending is benefiting smaller industrial and infrastructure companies that are physically building the ecosystem, not just the large software and chip names.
- Maher argues active management matters more in small caps because the Russell-style universe includes more unprofitable businesses and much wider sector dispersion.
- He says higher interest rates should make investors prefer self-funding companies and avoid businesses that rely on repeated external financing.
- Maher believes passive flows have helped concentrate capital in the largest stocks, which can leave smaller, improving companies undervalued until fundamentals become obvious.
Notable quotes
“you've got a couple of very powerful positive trends in place. I think broadly obviously the AI buildout”
“you have 20 30% kind of earnings growth expected over the next few years”
“nothing warms my heart when the markets, you know, run by seven gigantic stocks”
“if capital is plentiful and near free you know you can just keep coming back to the market kind of thing”
“we're as wary of really cheap stocks as we are really expensive stocks”
How the episode opens
Tom, welcome to Excess Returns. Thanks for having me. Appreciate it.
You've spent most of your career studying and investing in smaller companies. And currently you manage Hilton Capitals small and midcap opportunity strategy. And it's been a while since we've had anybody on to talk about small caps and small cap investing.
an area that sometimes gets maybe overlooked by investors particularly in the last decade when it's been a mostly a do a market dominated by the larger companies in the market but I think as we'll talk uh with you today about is there's plenty of opportunities in small caps we want to understand how you go about analyzing them what you look at and how you build a portfolio of small cap companies and in any response if you want to work in any musical reference, any song, feel free.
I I appreciate that offer. That's fantastic. Nice.
Yeah, we were. And just so the audience knows, all of Tom's quarterly letters sort of start with a a musical sort of tying in title and then you kind of flow into, you know, what you want to talk about with your investors, which which we love. So, um, okay.
So I think the first place we wanted to start is you recently wrote you were describing sort of how you're looking at the market, how you're posturing and you were explaining that you're sort of driving with two feet, one on the gas and one on the brake. So kind of talk us through what you mean by that.
Absolutely. And and if anything, since I wrote that letter, that's become more pronounced with the sort of day-to-day sort of volatility that we've seen certainly in the small midcap space, but even up mark market cap in the in the recent past.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- small-cap earnings
- ai infrastructure spending
- passive investing and etf flows
- reshoring industrial recovery
- valuation and financing costs
Companies and tickers mentioned
- Hilton Capital Management
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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