David Schuster, Portfolio Manager, Brown Advisory’s Small-Cap Fundamental Value
David Schuster is the Portfolio Manager for Brown Advisory’s Small-Cap Fundamental Value strategy.
Prior to joining Brown Advisory in 2008, he was a Managing Director for the financial institutions mergers and acquisition advisory group of Citigroup and a Managing Director in the M&A practice of Lazard Freres.
Mr. Schuster received his BSBA from Georgetown University.
After graduating from college, he served as an officer in the United States Army.
His fundamental analysis of industrial niche companies is informed from his experience on the M&A investment banking world of Lazard Freres:
“When we talk about value, we are first and foremost looking for companies that are generating high levels of free cash flow, but we are also combining that with a focus on finding companies that are trading at inexpensive valuations.
What that translates into for us is doing a real granular look at the financial statements, really understanding what the drivers of the business are.
In the small-cap space, there are oftentimes a lot of companies that are either misunderstood because of people’s perceptions of the company, maybe they are not well covered, or there might be some nuance around the balance sheet or the income statement that people just aren’t really appreciating from a valuation perspective.
We are looking for companies, as I said, that are generating that free cash flow, but also that we are buying at what we think are attractive levels.
Typically, for a lot of the companies we are thinking about things on an EV-to-EBITDA basis.”
One current example of this in their portfolio is a niche industrial product producer.
“One of our largest investments right now is a company called Ingevity (NYSE:NGVT).
It’s a good example of a company that’s generating attractive levels of free cash flow but still trading at a low valuation. It’s a little bit under $2.5 billion of market cap.
Just because you are a small-cap company doesn’t mean that you don’t have an attractive franchise, and I would say Ingevity has a very attractive franchise.
Their core business, they’re a leader in providing and selling activated carbons in these honeycombs that are sold to the auto and truck market.
They’re used to reduce emissions.
It’s a small, niche-y product, but they have probably 90% market share across the globe.
There are probably a billion of their products in service, literally across the world.
The business has very attractive margins; you’re looking at EBITDA margins north of 50%.
Obviously, over the last couple of years there’s been a lot of pressure, concern around EVs and the demise of the internal combustion engine, and that has been one factor that has put a lot of pressure on the stock.
The other thing that had happened was they had embarked on an M&A program that was unsuccessful.
About a year and a half ago, they brought in a new CEO who has really worked to clean up the portfolio and has been exiting a lot of non-core businesses and refocused the business just on its core elements.
And to give you a sense, we think the business next year will probably do $350 to $360 million of EBITDA.
Compared to today’s stock price, which is about $65, if you took the cash that’s on the balance sheet, the cash from some of these asset sales, and then put what we’d call a reasonable multiple on the earnings power of this business, you get to $100 to $120 per share, so really attractive upside.
At the same time, they’re not sitting on this cash.
They are actively out in the market buying back their shares, which we think from an owner’s perspective will increase our return at the end of the day as they reduce the total number of shares.”
Another portfolio example for this experienced money manager is an unknown player in the pharmacy space:
“I mentioned the health care space.
Another smaller company is called Guardian Pharmacy (NYSE:GRDN).
It’s about an $800 million market cap.
Once again, small company but really attractive franchise.
They are one of the largest pharmacies serving patients who live in assisted living facilities in the country.
They probably service about one in four residents.
If you think about the elderly population, they are living in assisted living facilities and taking multiple medications multiple times a day.
Guardian packages all the medications that this population needs and facilitates it in a way that helps the staff deliver those medications to the patients.
It’s a business that doesn’t need a lot of capital to grow, and they are able to take this dominant position and just continue to grow.
It has really attractive margins and overall trading at what we would consider not an expensive stock by any measure.”
The overlooked small cap sector is ripe for upside according to Mr. Schuster:
“The small-cap space does run in these long trends.
You can see sometimes these trends are seven, eight, 10 years long.
This last 10 years or so, as you point out, certainly the large-cap space has dominated returns.
As we talk to clients, that seems to be something that they have all seen, and a big question is, how long before that rotation might change?
We were thinking through the last couple of years, and especially in the middle of 2023 and the end of 2024 it started to feel like it was starting to shift back to small and certainly back to value.
Although, the advent of AI really captured investors’ imagination, and we have seen small once again trail.
I think what we have seen toward the latter part of 2025 and certainly into 2026 is that finally there are a lot of investors who have looked at some of the extremes that we’re at.
One of the statistics we look at is small caps as a percentage of the S&P 500.
Right now, according to Furey Research Partners, we are just a little bit under 6%.
The long-term average is under 11%.
So, that has caught people’s attention and refocused them.
I don’t spend a lot of time thinking about the valuations or the business prospects of the Mag 7, but certainly the magnitude of the market cap that’s in those versus the small-cap sector is quite stark.
So, we’ve certainly talked a lot about it, but what’s interesting is we have actually started to see it.
Year to date, small caps are up pretty materially relative to the broader market, and since the early part of last year we have seen small caps finally outperform.
I don’t want to be calling a turn for small or calling a turn for a rotation into value, but what we know is when those do happen, the relative returns that can be generated in the small-cap space can be quite significant for quite some period of time.
I think that’s one of the reasons why our clients think of using small cap and small cap value as part of a broader portfolio to capture some of that excess return.”
Get the complete interview along with all of David Schuster’s top picks, exclusively in the Wall Street Transcript.
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