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
Our investment philosophy is built upon three pillars:
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
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
Creative forward thinking
- Anticipating change can enhance value
- Small companies tend to be acquired more frequently than larger companies and for higher premiums
We use fundamental analysis and bottom-up stock picking in a multi-step process.
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.
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.
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.
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.
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