Investment Strategies > Small Cap Intrinsic Value

Small Cap Intrinsic Value

A research-intensive strategy that seeks to identify small-cap companies trading at a significant discount to their long-term value with an identifiable catalyst to help narrow the value/price gap over time

Employs a private equity-style analysis with a long-term investment horizon
Seeks to exploit recurring market inefficiencies due to limited analyst coverage and investor impatience with complex, cyclical and interrupted growth companies
Run by the portfolio manager who launched the product in 1997, supported by a seasoned team of specialized small-cap research analysts who, collectively, have navigated through numerous market cycles

Benjamin Nahum

Senior Portfolio Manager

Overview

Investment Philosophy

Our investment philosophy is built upon three pillars:

INDEPENDENCE

Conventional wisdom yields conventional returns

As contrarians, we think differently focusing on underperforming and out-of-favor sectors and companies
Small-cap stocks typically have less analyst research coverage and greater uncertainty as to profitability

VALUE

Earnings, assets and cash flow create shareholder wealth

We implement a private equity-style approach that employs an extensive financial tool set to establish intrinsic value estimates
Higher insider ownership of small-cap companies aligns management incentives with shareholders' interests

CATALYST

Creative forward thinking

Anticipating change can enhance value
Small companies tend to be acquired more frequently than larger companies and for higher premiums

Investment Process

We use fundamental analysis and bottom-up stock picking in a multi-step process.

1. Initial Screening

We identify potential investment candidates through screening publicly traded small-cap stocks with $200 million to $5 billion in market capitalization for price underperformance and other characteristics we find attractive.

2. Intrinsic Value Analysis

Value assessed through "private equity"-like analysis using three primary tools – cash flow analysis, theoretical earnings based on peer group returns on invested capital and recent merger and acquisition multiples. The objective is to identify companies selling at a 30% discount to our estimate of intrinsic value.

3. Catalysts

We not only seek to buy stocks at a material discount to their estimated intrinsic value, but also try to anticipate fundamental corporate changes that can enhance value, such as a merger, liquidation, spin-off, management change, share repurchase and/or other catalyst.

4. Portfolio Construction

Portfolios are diversified across sectors and individual security holdings and weightings are a by-product of our bottom-up investment process and depend on our market outlook.

Investment Themes

We have identified recurring market inefficiencies and frequently find opportunities among companies with complex corporate structures, cyclical business and growing franchises whose growth has been temporarily interrupted.

Cyclicality: Investors tend to avoid cyclical companies during downturns
Complexity: Investors tend to undervalue diverse, complicated companies
Interrupted Growth: Investors tend to undervalue small companies during periods of stalled or slowing growth

Additional strategies employing the intrinsic value philosophy are available including: All Cap Intrinsic Value, Mid Cap Intrinsic Value, Small/Mid Cap Intrinsic Value.

Management

Benjamin Nahum

Senior Portfolio Manager

42 Years of Industry Experience

16 Years with Neuberger Berman