Small-Cap Investing: Five Traits of Durable Disruptors

It’s not about investing in quick fads or speculative businesses, it’s about investing in durable disruptors with stamina

Investing in the small-cap space—a breeding ground for breakthrough businesses—can be a thrilling pursuit that offers meaningful upside potential. The flip side is that many of these businesses can burn bright and fade fast, carrying more risk.

As long-term investors, the Polen Capital Small Company Growth Team seeks to find tomorrow’s leaders today. We aim to selectively and exclusively invest in 25-35 earlier lifecycle companies that can compound their growth year after year.

For us, it’s not about investing in quick fads or speculative businesses. It’s about investing in durable disruptors with stamina. In our experience, these types of companies exhibit five key characteristics of what we call our investment “Flywheel.”

The Polen Small Company Growth Team Investment Flywheel

Graphic showing the Polen Small Company Growth flywheel attributes

At a minimum, we must believe all five of these conditions are in place for us to invest in any business. We think companies that exhibit all five Flywheel criteria have the optimal conditions for long-term compounding and can typically grow irrespective of market conditions and other external factors.

We bring the Flywheel to life through a company example: Revolve Group. Revolve is a next-generation online retailer that participates in the attractive, fast-fashion industry that spans apparel, accessories, and beauty. Revolve has established itself as a leading premium fashion destination for Millennial and Generation Z customers, where consumer spending is robust. According to the U.S. Bureau of Labor Statistics, Millennials and Gen Z consumers accounted for more than 26% of overall U.S. consumer spending, over 33% of expenditures on apparel and services, and over 28% of spending on personal care products and services.1 Over time, we anticipate this percentage will grow as more Gen Z consumers enter the workforce and Millennials reach their prime earning years.

Based on our research, Revolve exhibits all the components required for a virtuous cycle of compounding.

We believe that having these five criteria in place allowed Revolve to adapt quickly in a time of crisis and uncertainty. During the COVID-19 pandemic, Revolve pivoted its offerings and strategy to adjust to the new normal. The company expanded into adjacent categories like beauty, activewear, and intimates, enabling it to serve its customers’ more immediate needs, increase wallet share, and touch more aspects of their lives. This strategy shift has been successful, as demonstrated by the company’s ability to deliver record profitability and free cash flow during the fourth quarter 2020. The leadership team intends to use this competitive position to prioritize several vital strategic investments, including strengthening Revolve’s Owned Brands portfolio, expanding marketing, and accelerating brand-building around the globe.

Richard Branson said, “Small businesses are nimble and bold and can often teach much larger companies a thing or two about innovations that can change entire industries.” It’s this idea that makes small-cap investing a compelling growth opportunity, in our view. At the same time, we believe our disciplined approach keeps us firmly focused on companies with business tailwinds, financial flexibility, fiscal discipline, and the compounding power to become tomorrow’s leaders.

Important Disclosures
1 Source: U.S. Bureau of Labor Statistics. 2020 annual data.

This information is provided for illustrative purposes only. Opinions and views expressed constitute the judgment of Polen Capital as of October 2021 may involve a number of assumptions and estimates which are not guaranteed and are subject to change without notice or update. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness, or accuracy. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients. This document does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction.

This information should not be construed as a recommendation to purchase, hold or sell any particular security. Holdings are subject to change without notice. There is no assurance that any securities discussed herein will be in the portfolio at the time you review this post or that any securities sold have not been repurchased. The securities discussed do not necessarily represent the entire portfolio. It should not be assumed that any of the securities, transactions or holdings discussed were or will prove to be profitable or that any investment recommendations we make in the future will equal the investment performance of the securities discussed herein. For a complete list of Polen Capital’s past specific recommendations for the last year, please contact [email protected]. Past performance does not guarantee future results and profitable results cannot be guaranteed.