Investment Notes

Through the Lens of De Lisle Partners: April 2026

April 2026

Positioning for uncertain times

Over the past three years, the VT De Lisle America Fund has returned an annualised 13.9%, comfortably beating every small cap index. This performance is pleasing given its lack of big tech stocks. Investors who recall how ‘cheap’, on a P/E basis, the Fund was three years ago, are now asking whether it is still cheap as its P/E has risen.

This question is part of the Value versus Growth debate. Value focused investors think their stocks are cheap and are bound to revive, but they risk owning value traps that go nowhere. Growth investors champion the quality of their stocks, saying they are long-term winners, but can get hit by sharply falling multiples should the company falter. At De Lisle, we synthesise these two views by combining Value with Momentum.

A stock that is cheap and going up in price is anomalous, suggesting its fundamentals are changing thus it’s being re-rated. This intersection is where we want to sit and the Fund often trades to take advantage of these anomalies.

Between the Autumn of 2022 and the Spring of 2023, the Fund’s trailing 12-month P/E bottomed at 7x earnings. This was a period of worsening conditions for smaller companies as the yield curve inverted and Bloomberg forecast a 100% chance of recession. Yet the Fund still returned 0.5% in 2022, avoiding a significant drawdown unlike the S&P 500 (-9%), Russell 2000 (-10.4%) and NASDAQ 100 (-25.5%). Our companies had cycle low earnings attached to cycle low valuations and prices that were collectively flat – a rare occurrence which we highlighted at the time.

Recession never happened but disbelief in the recovery persisted for two more years. While the Fund’s P/E moved up as sentiment slowly improved, backward-looking earnings remained supressed.

Since the end of 2022, the Fund has cumulatively returned roughly 140% and its trailing P/E has roughly doubled to 15x earnings even though turnover has been low. So why has the P/E expanded faster than earnings have gone up? It is usual to assume that in stocks with steadily rising earnings, such an increase in P/E means they have become more expensive while nothing much has fundamentally changed for the company.

But our stock picks are different. They do not generally have straight line earnings. We prefer more cyclical stocks in the Industrial, Energy, Materials and Consumer sectors whose P/E ratios have risen in anticipation of a faster rise in future earnings. Paradoxically, this move returns us to a more ‘normal’ scenario where companies with earnings near cycle lows are on higher trailing multiples as the market anticipates recovery. When this happens, their earnings catch up to the multiple – unlike the steady growth stocks where earnings just keep plodding along.

We see this effect in the Fund’s current 13.4x multiple of next year’s earnings which sits about 10% lower than the trailing multiple as growth is expected at that rate. Given that small cap earnings estimates only turned positive last summer, there is likely to be more earnings upside to come.

Relative to its forward estimated growth rate, the Fund’s P/E to growth (PEG) ratio is just 1.1x – a healthy 15% discount to the ‘growthy’ S&P 500’s PEG ratio, and a 25% discount on forward P/E. If a stock had these stats, we would be buying it.

However, we think the Price-to-Sales ratio is a more useful indicator because a company mostly cannot massage its sales figures in the way it can optimise its earnings. Another plus is that over long periods the P/S normalises how a stock is valued relative to its margins (one year’s earnings can be abnormally high or low as most companies have changing margins over cycles). Winnebago, for example, has made a 6% average operating margin over the last 20 years with a 0.6x average P/S, but today trades on 0.3x its sales as earnings are cyclically low. On this analysis, Winnebago’s share price could more than double with a sales upswing and not be expensive – its 26x trailing P/E doesn’t tell this story.

P/S is gaining predictive power in the market as we focus more on industrials with growing backlogs that convert to future sales. Good management teams can effectively price contracts, expand margins and achieve large earnings growth that is not captured by a P/E analysis.

Despite the current stock market volatility caused by the Middle East conflict, its effect over the long-term makes our stock themes more relevant now than ever. The aftermath of the conflict will only reiterate the importance of energy security, onshoring industrials and the AI build-out, the latter increasingly linked to military supremacy. All these sectors require more capex and government spending furthering the rotation towards companies that have the tangible assets to deliver essential services, and away from those with intangible assets whose values will diminish.

We believe the Fund remains cheap on 13x forward earnings and attractive relative to the US market. But what excites us most is the increasing growth prospects for our companies that could make them the industrial leaders of tomorrow.

Important Information

Past performance is not a guide to future performance; the value of an investment and income from it can go down as well as up. Your capital is at risk. Please read the Prospectus before making an investment.