Allocating to Small Caps in Uncertain Markets: Stability, Security and Rebuild

As near-term uncertainty increases — whether driven by geopolitical conflict, interest rate and inflation expectations, or shifting macro narratives — investors are often forced to re-evaluate not just what they own, but why they own it. These environments bring us back to our foundation of a business-first mentality. They are less about prediction and more about positioning — in our view this is a time to plan for the long-term and not get caught up in the short-term trading that often occurs in these markets.

The question is not what the next headline will be, but whether the businesses we own are equipped to endure and compound through a wide range of outcomes. In recent months, we have organized our thinking around three core buckets or themes within the portfolio: stability, security and rebuild. Each reflects essential needs we see across the economy and society today.

The first bucket — which we refer to as stability — is where we have been finding some of the most compelling opportunities recently. While this may appear defensive in nature — in a world full of uncertainty, we believe these types of businesses tend to have a narrower range of outcomes. We also see this area offering some of the more attractive opportunities in the market today. Specifically, we have been leaning into businesses that address straightforward human needs such as healthcare, food and shelter. They are not immune to volatility, but their end markets tend to be less discretionary, and their value proposition is more durable. Below we examine several examples of recent additions to this bucket.

UFP Technologies is a strong example of stability within the healthcare sector. The company operates as an innovative designer and custom manufacturer of components, subassemblies, products and packaging primarily for the medical device industry. Over time, it has built exclusive or semi-exclusive access to several critical medical-grade materials and deep relationships with many of the leading medical device companies. Its role is not simply to supply inputs, but to work as a partner to help solve complex design and manufacturing challenges.

The company’s work with Intuitive Surgical is illustrative — each Da Vinci surgical robot requires multiple precision-engineered components, including specialized draping materials for each robotic arm — eight drapes per surgical use. This is not a one-time sale; it is an ongoing, repeatable source of demand tied to a growing installed base. However, UFPT is down close to 40% from its highs in late 2024 amid uncertainty around healthcare policy under the current administration, which has pressured many companies in the space. Healthcare is essential — these procedures are not discretionary, and we do not believe volumes will decline to the extent implied by current valuations. In fact, UFPT’s recent contract renewal with Intuitive Surgical was extended for multiple years and expanded materially in volume across existing programs. In our view, this is an opportunity to add to a resilient business with a strong moat and promising long-term growth opportunities.

In shelter, Centerspace provides exposure to a different form of stability. As an apartment REIT focused on markets in the upper Midwest and Mountain West, the company owns a portfolio of properties that serve a fundamental need — housing — in regions with differentiated supply and demand dynamics. We believe these assets may be positioned to generate steady, inflation-like internal growth, with the potential for additional upside as the company continues to improve operations and scale its platform.

We see value in owning a collection of properties with durable demand characteristics and the ability to preserve and grow cash flows over time. In an environment where the path of inflation and interest rates remains uncertain, we think businesses like Centerspace offer a degree of resilience. If inflation persists, replacement costs rise, reinforcing the value of existing assets. If conditions become more accommodative, there is the potential for multiple support through cap rate compression. In either case, we believe the underlying business remains intact.

Food represents another area where necessity drives resilience. In our view, Utz Brands is a uniquely positioned small-cap company within the salty snacks category — a space that has historically demonstrated consistent demand across economic cycles. What differentiates Utz is its vertically integrated model, controlling much of the value chain from manufacturing through distribution. This structure provides both margin control and strategic flexibility.

Recent oil price volatility has put pressure on both consumers and freight/diesel costs. As a result, many consumer-packaged goods companies, including Utz, have come under pressure. We believe this is short-term noise and the market is underappreciating the company’s long-term growth potential. Opportunities to expand distribution, particularly in mass and club channels, remain significant, as does the continued development of higher-growth “better-for-you” offerings such as Boulder Canyon. At the same time, the company’s predominantly domestic sourcing and sales footprint — with the vast majority of inputs and revenues tied to the US — provides a degree of insulation from global disruptions and tariff-related pressures. This is not a high-growth, high-volatility business. It is a steady compounding opportunity grounded in a category that serves a basic consumer need.

Beyond stability, we are also finding interesting opportunities tied to national security and infrastructure rebuild — both of which are seeing accelerated demand in the current environment. Ongoing geopolitical conflict, particularly in the Middle East, is creating a need to both rebuild damaged infrastructure and replenish depleted defense stockpiles. For several years, these dynamics have been building, driving renewed investment in defense and highlighting the importance of maintaining and modernizing capabilities. Today’s environment simply brings that need into sharper focus. We have several businesses in the portfolio with meaningful exposure on the national security front, including Ducommon, Graham Corporation and Allient Corp.

Infrastructure rebuild, while partially driven by geopolitical conflict, also reflects a broader reorientation of the global economy. The continued push toward onshoring and domestic production has reinforced the need to invest in physical infrastructure — manufacturing capacity, supply chains and the systems that support them. After more than a decade in which capital flowed disproportionately toward software and service-oriented models, there appears to be a growing recognition that tangible investment is required to support long-term economic resilience. This shift is neither immediate nor linear, but it is directionally meaningful. Businesses tied to this rebuilding process may benefit if capital continues to be deployed toward the physical economy. One business that we have been adding to recently and encapsulates this theme is ESAB Corporation. As a global leader in fabrication technology, particularly welding and cutting equipment as well as gas control, we believe ESAB is well positioned not only to benefit from the rebuilding of physical infrastructure domestically but also abroad, with tailwinds from the re-industrialization of Europe and potential rebuilding efforts in the Middle East.

Across all three buckets, our approach remains consistent. We are not attempting to time macro inflection points or position the portfolio for a single outcome. Instead, we are building a collection of businesses that we see fit to navigate uncertainty — with resilient end markets, prudent balance sheets and the flexibility to act when others cannot. The long-term durability of the fundamentals of these businesses is underappreciated.

Uncertainty may continue to rise in the near term. Markets will adjust, narratives will evolve and new risks will emerge. But the discipline of focusing on resilient businesses — those that serve essential needs, operate within defensible niches and are led by thoughtful capital allocators — from our perspective provides a steady foundation. Over time, that foundation is what allows us to deploy capital opportunistically, support our positions through periods of stress and create the possibility of long-term value creation.

We remain confident in that approach. Not because we can predict what comes next, but because we are anchored in businesses we believe are built to endure it.