Excess Returns · Oct 7, 2026 · 1h 6m · 45m saved
With Tom Maher, Portfolio Manager of the Small & Mid Cap Opportunities strategy at Hilton Capital Management
By Tom Maher's own count, made a while ago, one or two of the Magnificent Seven were worth more than the entire small and midcap market he invests in.
For most of the past decade that concentration made sense, he said, because the biggest companies grew revenue and earnings faster. He said that has started to reverse, with earnings now accelerating at smaller companies, and a small shift of money out of the giants would be large relative to his market.
"Now from a supply demand perspective that's fantastic because again a little trickle out of the larger cap holdings are massive relative to the overall market space I deal in." — Tom Maher
Tom Maher, portfolio manager of Hilton Capital Management's Small & Mid Cap Opportunities strategy, on Excess Returns. He has invested in smaller companies for most of his career, long enough to have dealt with the same chief financial officers at two or three different companies, and his strategy holds between 50 and 75 stocks drawn from a universe of more than 2,500.
The full interview is covered here so you can skip it. 66 minutes of audio, 21 minutes of reading.
Here are the 16 takeaways that matter.
Key Takeaways
Small and midcap earnings are expected to grow 20–30% over the next few years, helped by the AI build-out and better margins
Large caps deserved their decade of dominance because their earnings grew faster, and Maher said that has started to reverse
His strategy starts every sector weight at zero, not at the index weight, and builds up from there
A small cap stuck in a thematic ETF basket can move with that basket for 6 to 12 months, whatever its own business does
Without attention from investors, small caps have to prove earnings growth before the market pays for it
That favors steady quarter-to-quarter improvement over a promise of wider margins in three years
He screens on 10 years of a stock's own valuation history and is as wary of the cheapest stocks as the most expensive
Reshoring is real but gradual, driven by Covid, tariffs and the war with Iran more than by policy
Knowing too much about a company has diminishing returns, because two or three things decide whether a small cap works
Booking partial profits as a stock rises is a hallmark of his strategy, and he watches closely when a stock moves the opposite way to the news
1. One Foot on the Gas
The host asked about a line from one of Maher's quarterly letters, which said he was driving with one foot on the gas and one on the brake.
The gas pedal is the AI build-out and strong expected earnings growth
Maher said the AI build-out is a large driver of GDP growth, with "a massive amount of capex coming through" and many follow-on businesses to come from it. Expected earnings growth for small and midcaps is strong, he said, at 20% to 30% over the next few years, which fits with strong GDP growth.
The brake pedal is a market that cannot decide how to price those trends
Since the second quarter, he said, investors have asked whether the build-out has passed its peak rate of acceleration. Because the possible changes are so large, the market swings violently in both directions. Semiconductors and software traded as opposite sides of a pair.
"But up until recently, if you told me semis are up 2% today, I could tell you the software was down 2%." — Tom Maher
"Because the prevailing belief was, AI is going to kill all software companies, right?" — Tom Maher
Inflation and a Fed that may now be in a rate-raising cycle add to the worries. Instead of a calm mid-cycle market, he said, a manager has to be "on a hair trigger," deciding what to react to and, more important, what to ignore.
The valuation multiple is the market's judgment, and it can change fast
Maher said he thinks of a stock as its price and its earnings, with the multiple as the market's verdict at a point in time. In the second quarter almost no scrutiny was applied to the valuation of anything connected to the AI build-out, and that unwound quickly in the third quarter. He said some of those stocks may reach a level where earnings growth supports the multiple once the excess is gone. The market is trying to judge, instantly, developments that will last 20 or 30 years, he said, so prices move in "a little bit of a sawtooth pattern."
