Calamos Timpani small cap growth fund bets on beat-and-raise stocks

The Calamos Timpani Small Cap Growth Fund is leaning into a classic Wall Street sweet spot: small companies that beat expectations, raise their outlooks and keep profit margins moving the right way.

Brandon Nelson of Calamos Investments, who has run the fund since its March 2011 launch, told MarketWatch that his team looks for businesses with a “unique edge” that can help them gain sales while widening margins. He also wants management teams that are skilled at setting expectations they can beat.

The fund held 90 stocks as of June 30, according to Calamos. It had $796 million in assets and carried Morningstar’s five-star rating in the Small Growth category, MarketWatch reported. Naperville, Ill.-based Calamos Investments manages about $52 billion across strategies.

What is the Calamos Timpani small cap growth strategy?

Nelson’s strategy centers on companies that appear early in a long growth run, especially when analysts may be underestimating future sales or earnings. In market shorthand, a “beat-and-raise” company reports results above consensus estimates and then lifts its own guidance, often prompting analysts to increase forecasts.

Nelson told MarketWatch that rising estimates can lift a stock even if its valuation multiple stays flat. His aim is to buy early enough that the price-to-earnings multiple expands too, as more analysts cover the stock and investors gain confidence in management.

The fund also sells quickly when growth starts to look tired. Nelson cited warning signs such as slower orders, a shrinking backlog, weaker gross margins or longer collection times after sales are booked. He told MarketWatch the team trims exposure when it thinks a stumble could mark the start of a bigger change.

Mama’s Creations and Sterling Infrastructure stand out

Mama’s Creations was the fund’s seventh-largest holding as of June 30, at 2.6% of assets, according to Calamos. The prepared-foods company has an $825 million market value and sells through retailers including Costco, BJ’s and Sam’s Club, which is owned by Walmart.

For the fiscal quarter that ended April 30, Mama’s Creations reported $52.8 million in revenue, up 50% from a year earlier. LSEG data cited by MarketWatch showed all eight sell-side analysts covering the stock rated it a buy, while the stock traded at 57.3 times forward earnings.

Nelson said the company believes it can reach $1 billion in annual revenue within a few years. He also said Mama’s is improving distribution, broadening its products and pursuing acquisitions in the prepared deli-food niche, which he described as a $40 billion U.S. market.

Sterling Infrastructure was the fund’s third-largest position at 3.2% as of June 30. The Texas-based company works on site preparation for new facilities, including data centers and semiconductor plants, and added electrical capabilities through its September acquisition of CEC Facilities, according to MarketWatch.

Sterling has a $20.3 billion market capitalization and traded at 31.3 times forward earnings. For the first quarter, the company reported revenue of $826 million, up from $431 million a year earlier, while earnings per share rose to $3.13 from $1.29.

How the fund has performed

LSEG ranked the Calamos fund fourth among 93 peers for one-year total return, second for three-year return, seventh for five-year return and fourth for 10-year return, after expenses and excluding sales charges.

Through June 30, the fund’s Class I shares returned 64.8% over one year, 34.6% annualized over three years, 10.2% over five years and 18.3% over 10 years, according to LSEG. Its net expense ratio was 1.05%, including a temporary 0.04% reimbursement scheduled to last until at least March 1, 2027.

This story draws on original reporting from MarketWatch.