Across the pond: unpacking tariffs, AI and efficiency with America’s SMidCap innovators

Not all visitors are guaranteed a warm welcome to the US these days, as the events of the past couple of weeks will attest to! However, as my colleague Guido and I ventured around the country last week meeting 25 companies, both existing holdings and prospects, we were welcomed with open arms by some of the best and brightest management teams in global SMidCap, all too happy to convey their strategies for navigating the zeitgeist and the fundamentals that place them firmly into our investment sweet-spot of ‘Quality Growth’.

This trip wasn’t just a chance to put faces to names or sip coffee in boardrooms — it was a deep dive into the beating heart of American innovation, fuelled by Montanaro’s commitment to rigorous, bottom-up research. We uncovered insights that reinforce why meeting companies in person remains a cornerstone of our investment process. From the cutting-edge facilities of TransMedics to broader discussions on tariffs, AI and efficiency-driven 80/20 initiatives, here’s what I learned — and why it matters.

The benefit of boots on the ground

Let’s start with the obvious: investing isn’t just about numbers on a screen or analyst reports — though we have plenty of those. It’s about understanding the soul of a company, its people and its vision. At Montanaro, we pride ourselves on a bottom-up approach and this trip exemplified why that matters. With a team of sharp-eyed Analysts who dig into financials, pore over industry trends and model scenarios with precision, we’re able to go beyond the headlines and quarterly filings. But there’s something irreplaceable about walking the factory floor, shaking hands with management and seeing operations firsthand. It also helps drill into that intangible asset that doesn’t sit on balance sheets: culture, which we experienced by meeting  ‘shop floor’ employees to even witnessing a sales exec hitting a gong to a round of cheers having clinched a big deal.

Spending time on the ground also enables you to build better relationships and a better understanding of what makes management teams tick, which is harder in a conference room or on a Zoom call. Generally we find CEOs to be far from the ‘prima donnas’ you read about in some of the MegaCaps, though at one dinner we were regaled with stories from a CEO’s night at the Oscars the previous night!

TransMedics: a front-row seat to innovation

One of the highlights of the week was our visit to TransMedics, a company we’ve long admired for its transformative approach to organ transplantation. We spent 3 hours with multiple members of the team, including visionary founder Waleed Hassanein. Walking through their facilities, we saw the Organ Care System (OCS) in action — a technology that keeps donor organs viable for longer, potentially saving thousands of lives while disrupting the transplant industry. The team there walked us through their latest advancements, including next-generation technologies they recently unveiled. Their ambition? To hit 10,000 OCS transplant cases annually in the US by 2028 — a 23% compound annual growth rate – as they substantially grow an organ transplant market that had been stagnant for years.

What struck me most wasn’t just the tech — it was the palpable sense of purpose: every successful transplant is a live saved. The management team exuded confidence, backed by an 83% year-on-year revenue jump in 2024, and they have built an impressive nationwide logistics operation managed by a central command centre to support future growth; we even saw a live case register on their command centre during our visit. This isn’t just a company executing a plan; it’s one redefining an industry. Listening to the Supply Chain Director explain how they are preparing for expansion well beyond medium term targets as we walked the factory floor isn’t the kind of insight you get from a Zoom call.

Above: TransMedics’ innovative organ transplant systems (left), Adam, Guido and the TransMedics management team (right)

SMidCap: technology leaders

With the dominance of the ‘Magnificent 7’ capturing much market attention these days, it’s easy to forget that most innovation in the market comes from smaller companies. Indeed, the best SMidCaps tend to dominate niches thanks to superior competitive dynamics which often includes the technological leadership that comes from having an R&D machine totally dedicated to one area.

We spent time with machine vision producer Cognex, whose world leading technology helps companies improve product quality, eliminate production errors and lower manufacturing costs. We were treated to impressive demonstration of their latest 3D and 2D systems, including the reading of a barcode that was barely noticeable to the naked eye. Elsewhere we were privileged to see many of Bruker’s differentiated high-value life science research and diagnostics solutions which enable scientists to make breakthrough discoveries and develop new applications that improve the quality of human life.

Above: one of Bruker’s leading Mass Spectrometry machines (left), one of Cognex’s 3D vision systems (right)

Tariffs: the elephant in the room

Across nearly every meeting, tariffs loomed large. With US policy shifts on the horizon, companies are bracing for potential changes in trade dynamics. SMidCap firms, often more nimble than their LargeCap peers, are already adapting — some by reshoring supply chains, others by rethinking pricing strategies. More than one CEO laid out a compelling case for how tariffs could actually benefit their business by levelling the playing field against cheaper imports. Whilst we’d been modelling tariff scenarios before the trip, hearing management’s real-time responses — and their contingency plans — brought those numbers to life. The reality of the tariff yo-yoing struck home as one CEO with a high recurring revenue stream lamented charging the same Canadian customers X on Tuesday, X +25% on Wednesday and X again on Thursday; it can be easy to miss the real-world cost amongst all the macro policy pivots.

AI: the efficiency engine

Artificial intelligence was another recurring theme and not just in the tech sector. From healthcare to manufacturing, companies are leveraging AI to streamline operations and boost margins. One firm we visited showed off an AI-driven platform that optimises production schedules in real time, cutting waste and boosting output.

AI ties into a broader push for efficiency and many of our holdings are espousing 80/20 initiatives based on the Pareto Principle; this is the idea that 80% of a company’s profits often come from 20% of its efforts. Firms are doubling down on this; focusing on high-impact products, shedding low-margin lines and using AI to identify those sweet spots. management teams walked us through their 80/20 playbook, highlighting in many cases material upside to margins. It’s not just a buzzword; it’s an earnings driver we can quantify and track.

Looking ahead

Ultimately the trip helped us to focus on company fundamentals at a time of significant market gyrations. Time spent with management and at company facilities helps sharpen our edge as long-term investors and the beauty of this mindset is you can invest through the volatility and take advantage of valuation opportunities offered by ‘Mr Market’. What was evident from the trip is that Quality companies with strong pricing power will be the winners in this environment, so we stick to our knitting of backing the best management teams running companies with strong competitive moats. Our portfolios are full of these, and we may just have found one or two more.