Gulf between small industrials earnings and valuations could narrow, but recovery uneven

Mike Younger

The gulf between earnings and valuations for quality small industrial stocks could be starting to narrow as corporate deal activity picks up and reported earnings surpass expectations, according to a small and micro-cap investing expert.

Small industrial stocks have experienced an unusual disconnect between earnings and value across most of 2026, according to Mike Younger, Portfolio Manager for the Prime Value Emerging Opportunities Fund and Prime Value Microcap Fund. “The volatility in 2026 has created an interesting disconnect between earnings and value for several quality small industrial companies.

“While the market has negotiated some tricky conditions this year, many smaller companies exceeded their earnings growth expectations this reporting season. And an uptick in deal activity is likely to be a positive.

“However, any recovery is likely to be uneven”, Younger said.

“Different segments of the market are running at different speeds, so it pays to be selective. For example, consumer-exposed cyclical sectors slowed in recent months while sectors including data centres, infrastructure contractors, and maintenance contractors to utilities have done well.”

Younger said the recent small industrials malaise is highly unusual historically. “The Small Industrials Index has posted long-term returns of 8% per annum since 1990, but since January 2020 has only averaged around 1% per annum.

“While the overall index has been sluggish, many quality companies within the index have posted higher than expected earnings growth, and are poised for strong future earnings.

“When researching and meeting with these companies we frequently find that company performance is different to expectations, which provides us with an opportunity to take a high conviction position in a company that looks undervalued.

“We don’t see this disconnect between earnings and value as lasting forever. With valuations so attractive and many companies providing highly certain earnings growth in coming years, it won’t take much for bargain hunters to pounce, and we may be seeing some early signs of a shift”, Younger said.

The small cap Prime Value Emerging Opportunities Fund Class A has delivered 9.7% per annum net of fees to investors since inception in October 2015 to 31 August 2026.

Prime Value Asset Management was founded in 1998 and is part of an investment group including Shakespeare Property Group, managing circa $3 billion in equities, income securities, direct property and alternative assets.