Volatile Markets: Diamond Hill Capital Assesses Small-Cap Stocks

The investment firm Diamond Hill Capital has released its investor letter for the "Small Cap Fund" for the third quarter of 2024. In a volatile environment, the markets experienced remarkable gains. The Russell 2000 Index increased by 9%, while the broader Russell 3000 Index rose by just over 6%. Against this backdrop, the strategy slightly lagged behind the index, achieving a return of 8.43% compared to 9.27% for the Russell 2000 Index. The investor letter paid special attention to the stock of Live Oak Bancshares. This Wilmington, North Carolina-based bank holding company, which offers commercial banking products and services, showed varied performance in the third quarter. Shares of Live Oak experienced a decline of 13.36% in the last month, but were able to demonstrate an increase of 31.18% over the year. On October 30, 2024, the stock closed at a price of $40.01 with a market capitalization of $1.802 billion. Diamond Hill Capital identified Live Oak Bancshares in their letter as one of the significant contributors in the third quarter. The shares increased in line with a broader upward trend in the financial sector, as investors anticipated an upcoming round of interest rate cuts. Despite the general market rally, the firm values Live Oak for its solid balance sheet, which positions it well compared to its industry peers for the upcoming interest rate changes. However, Live Oak Bancshares does not currently seem to be the top choice among hedge funds, as it was represented in only 9 hedge fund portfolios at the end of the second quarter, compared to 10 in the previous quarter. While the potential of Live Oak is acknowledged, Diamond Hill sees greater opportunities in AI stocks, which are considered more promising in terms of returns in a shorter time frame. Particularly emphasized is an AI stock that is said to have similar potential to NVIDIA, but is traded at a multiple of less than five times its earnings.