Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How to Find Hidden Gems in Small Cap Stocks
Transcript
- Lucas: The Russell 2000 is down two point four percent over the last five days, landing at two thousand eight hundred ninety-seven. It feels like every time I look at the smaller companies, they’re just dragging the broader market down with them. Luna: But isn't that exactly where the opportunity lies? If the big caps are getting priced for perfection, maybe the real alpha is hiding in the dust. Lucas: That’s the conventional wisdom, but let’s look at the data for a second. We’ve got Macy’s moving premarket today, and Signet Jewelers making waves too. These aren’t random fluctuations; they’re signals of shifting consumer behavior in a way that mega-caps like Apple or Microsoft simply can’t replicate right now. Luna: So you’re saying we should be looking at specific names like Signet rather than just betting on the index? Lucas: Exactly. And before we get too deep into the weeds of individual tickers, I want to take a quick second to acknowledge the people who keep this show running. If our money conversations have helped you think about a decision differently, honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Luna: Yeah, it really does help keep the lights on and the research sharp. Thanks for listening. Lucas: Back to Signet. They’re up significantly in midday trading, which is interesting because jewelry is usually a discretionary spend that gets cut first when inflation bites. Yet, here they are gaining ground while the rest of the retail sector stumbles. Luna: Is it just wedding season demand, or do they have a pricing power play that’s working? Lucas: It’s a bit of both, but mostly operational discipline. While everyone else is worried about gross margins getting crushed by supply chain costs, Signet has been aggressively managing inventory levels. They’re not chasing volume; they’re chasing yield. That’s a subtle but critical distinction for stock pickers. Luna: So they’re prioritizing profitability over growth, which usually means higher dividends or buybacks? Lucas: Precisely. And in a market where interest rates are still sticky, capital return matters more than expansion plans. This ties back to what we discussed in episode one seventy-two about Exxon. The market rewards cash flow, not just future promises. Signet is delivering cash flow right now. Luna: But isn’t there a risk that their customer base is shrinking? If fewer people are buying diamonds, eventually the well runs dry. Lucas: That’s the negative selection part of the equation. You have to ask: who are we NOT buying? We’re avoiding companies that rely on speculative growth in high-interest environments. Signet’s model is proven, even if it’s not sexy. Sexy stocks like Snowflake or Palantir often trap pickers because the valuation leaves no room for error. Luna: Right, because if the narrative breaks, the multiple collapses. Signet’s multiple is already compressed, so the downside feels safer. Lucas: Safe is relative, but yes. The margin of error is wider. Let’s look at another name making moves: Casey’s General Stores. They’re up in premarket trading as well. On the surface, it’s just gas stations and convenience food. But dig into their unit economics, and you see something fascinating. Luna: I thought they were struggling with fuel margins recently. How are they doing? Lucas: Fuel margins are indeed thin, but Casey’s has shifted its mix heavily toward fresh food and proprietary brands. Their same-store sales growth in food service has outpaced the broader convenience industry for three consecutive quarters. That’s a durable competitive advantage, or a moat, if you will. Luna: So they’re basically a restaurant company disguised as a gas station? Lucas: Exactly. And that re-rating potential is what stock pickers look for. When the market starts realizing that Casey’s is more like Chipotle than Shell, the valuation multiple expands. Right now, it’s trading at a discount to fast-food peers, which creates that fresh window of opportunity we talked about earlier. Luna: It reminds me of the Meta rally we covered. Sometimes the market just needs a nudge to see the value correctly. Lucas: Meta went up six point seven percent last week, driven by advertising efficiency. Casey’s is moving similarly, but for different reasons. It’s operational execution, not tech disruption. Both are valid paths to alpha, but they require different types of due diligence. Luna: Do you think small caps will continue to underperform the S&P 500, which is still hovering around seven thousand six hundred? Lucas: The S&P is down one point nine percent over the last five days, so it’s not exactly having a great week either. But historically, small caps lag during uncertainty and lead during recovery. We’re not in a full-blown recovery yet, but the cracks in the big-tech dominance are starting to show. Luna: Like how NVIDIA dropped four point three percent? Investors seem nervous about AI valuations. Lucas: NVIDIA is down to two hundred eighteen dollars, which is a correction from its highs. It’s a massive company, but the expectations are sky-high. When you have that much priced in, any minor disappointment sends the stock tumbling. Meanwhile, Casey’s or Signet don’t have those lofty expectations. A modest beat is a huge win for them. Luna: So we’re essentially buying resilience versus speculation? Lucas: Yes. And that brings us to the concept of concentration. In episode one eighty-one, we talked about why a concentrated portfolio works better in 2026. With only twenty to thirty holdings, you can afford to do deep dives on names like Casey’s instead of skimming the surface on everything. Luna: But doesn’t concentration increase idiosyncratic risk? What if Casey’s gets hit by a regulatory change? Lucas: Regulatory risk exists, but it’s manageable. Unlike biotech, where one FDA decision can wipe out a stock, convenience stores face very little regulatory threat. The risk is more cyclical. If consumers stop spending, they go elsewhere. But given the current trend of 'trade-down' behavior, these businesses are actually benefiting. Luna: Trade-down? Like people switching from expensive restaurants to Casey’s food? Lucas: Exactly. Inflation is still a factor, albeit moderating. People are looking for value. Casey’s offers affordable meals in a convenient format. It’s a hedge against consumer fatigue. That’s why I prefer owning a slice of that business over trying to time the next big tech breakout. Luna: It sounds like you’re advocating for boring businesses that make money. Lucas: Boring is good. Boring pays dividends. Boring survives recessions. Look at Berkshire Hathaway, which is barely down half a percent today at five hundred five dollars. Warren Buffett has always preferred businesses he can understand. Small caps fit that bill perfectly if you put in the work. Luna: So the key is finding those boring businesses with a clear path to cash flow? Lucas: Without question. And ignoring the noise. Kalshi launched new products for gold and silver today, which is exciting for traders, but irrelevant for long-term investors. Focus on the fundamentals. Signet, Casey’s, maybe even some regional banks if you’re brave enough. Luna: Regional banks are tricky with the commercial real estate exposure. Do you see any opportunities there? Lucas: JPMorgan is down two point six percent, but they’re a fortress balance sheet. Smaller regional banks are still risky, but if you find one with strong deposit growth and low loan losses, it could be a hidden gem. It’s all about the details. Luna: It seems like the best strategy is to be contrarian but disciplined. Lucas: Contrarian because you’re buying when others are fleeing small caps. Disciplined because you stick to the criteria: cash flow, moat, and reasonable valuation. It’s not easy, but it’s profitable. Luna: I guess the question is, are we ready to commit to that discipline in the short term? Lucas: That’s always the hardest part. Watching the VIX spike or the Nasdaq drop tests your resolve. But if you believe in the underlying businesses, the price is just a number. For Casey’s, it’s a buying opportunity. For Signet, it’s a sign of strength. Luna: And for the big tech giants, it’s a chance to reassess whether the hype matches the reality. Lucas: Right. And sometimes the reality is just fine without being spectacular. Maybe that’s the secret to building wealth that lasts. Not chasing the moonshot, but owning the engine that keeps the plane flying. Luna: So, if you had to pick one small cap to watch tomorrow morning, who would it be? Lucas: I’d keep an eye on Casey’s General Stores. If that upward momentum holds through earnings season, it could set the tone for the rest of the sector. Luna: Solid choice. Simple, understandable, and cash-rich. Lucas: Exactly. And remember, it’s not about predicting the market. It’s about understanding the business. Luna: Well said. Let’s see if the market agrees tomorrow.