Does Blackstone Read The Bleeding Edge?

On September 26, I told you it was the best time to buy small-cap stocks in 20 years.

It was an unpopular opinion.

The Fed warned interest rates would remain “higher for longer.” And the Russell 2000 – which tracks small caps – was down 10% since July.

I don’t know how many people I convinced to buy small caps at that time. But hopefully, you were one of them. Since then, the Russell 2000 is up 6%.

Admittedly, I was a bit early. The Russell 2000 drifted lower through October. But since November it’s been on a hot streak.

That’s because big money is now moving into the space.

Last week, Blackstone – the world’s 12th largest money manager – acquired a small-cap tech stock called Rover.

Rover started out in 2011 as a dog-walking app. It’s since expanded to include boarding, daycare, and grooming services.

It’s like an Airbnb or Uber… but for your pets.

But we don’t need to get lost in the details about Rover.

The big picture here is that private equity (PE) is hunting for deals on the public market. And that’s creating an opportunity for you to make money like the big-money players do.

Follow the Smart Money

PE investors aren’t hedge fund cowboys gambling for fast money. They’re the big-money value buyers.

They’re looking for long-term value… And they’re not afraid of taking contrarian positions.

In 2020, PE firms like Cerberus and Pretium Partners started snapping up single-family homes.

That was amid the pandemic when hedge fund manager Bill Ackman warned, “hell was coming”.

But PE saw what took the rest of the world longer to realize… that debt was cheap and inflation was about to take off thanks to stimulus checks and near-endless money printing.

Homes were the perfect bet at the time.

PE firms could take on huge debt at near 0% interest rates… and their assets would appreciate even more during high inflation.

Of course, that wasn’t the only time PE was right.

In 2010 Blackstone began investing in distribution centers and warehouses. Blackstone’s idea was simple… buying online through sites like Amazon.com was only going to grow.

So owning the infrastructure that supported e-commerce would lead to outsized returns.

But in 2010 this was considered a risky move. The economy was still recovering from the 2008 financial crisis.

But Blackstone used that to their advantage. It invested more than $100 billion into this infrastructure while others were still hesitant to make big bets on retail sales.

Blackstone has averaged more than 20% yearly returns on this bet… proving they were right to bet big and early on e-commerce.

The point here is that PE firms are worth paying attention to. We can’t always follow them on deals. Most people don’t have enough cash sitting on the sidelines to buy investment properties… much less the millions or even billions to buy private companies.

But today, PE is bargain hunting on the public market.

That’s why Blackstone bought Rover for a roughly 30% premium.

And that’s not the only case of PE buying small-cap tech. Recently, I recorded a video highlighting a $1 billion investment for Jacobs Private Equity firm into SilverSun Technologies, another small-cap tech company. 

Over the coming weeks and months ahead, we’re going to hear about even more deals like this.

PE knows that small-cap tech stocks are cheap. And they’re going to be quietly snapping them up until they aren’t anymore.

To get broad exposure to this trend, consider buying the iShares Russell 2000 ETF (IWM) that I recommended back in September. It’s only just started its rally.

I could see shares of IWM going up another 30% to $240 over the coming months thanks to the coming buying spree.

Regards,

Colin Tedards
Editor, The Bleeding Edge