Opinion: This fund manager’s record of outperformance is excellent and he is ready to share his system with you
It’s great to try and learn from top investment masters like Warren Buffett. But don’t make the mistake we make in the media by focusing too much on Buffett and a few other legends.
Otherwise, you’ll miss out on key investing lessons from other professionals with stellar records, especially those in the investing industry over the past few years.
Consider Josh Bennett and his team at Algiers Weatherbie Specialized Growth Fund ALMAX,
Never heard of them? Let me bring you up to speed. Believe me, it will be worth it. I share six key investing tactics below.
But first, the numbers. This fund has grown by an average of 25.5% annually over the past five years. That means Bennett and his team beat their benchmark of the Russell Mid Cap Growth Index by 5.9 percentage points, annualized, during that time, according to Morningstar.
Bennett has been with Weatherbie Capital since 2007. His store was bought by Alger Associates in 2017. The fund has $ 1.6 billion in assets and fees of 1.27%.
Lesson 1: Stick to your system
Bennett attributes the key tactics, described here, to the “Weatherbie Method,” developed by Matthew Weatherbie and his team in the mid-1990s. Why change, if they work?
“Stick to your knitting when a process is tried and tested over time,” Bennett told me in an interview.
It sounds too simple to include, but never forget it. Many investors get into trouble because they succumb to what in the fund industry is called style drift.
Lesson 2: Go small
Small-cap stocks are a great place for stock pickers for one simple reason – many investors avoid this end of the market. He has little coverage from Wall Street analysts. If there is, it is by a junior analyst. (Same on the buy side.) This makes small caps an area where good research can create an informational advantage. You are not likely to get this with a Facebook FB,
or Tesla TSLA,
Bennett and his team like to get into companies before their market cap hits $ 2.5 billion, often between $ 1 billion and $ 1.5 billion. The fund’s average market cap is $ 4.9 billion, according to Morningstar, compared to $ 19.5 billion for its mid-cap growth category and $ 23 billion for its benchmark.
When looking for small cap companies, Bennett applies the following rules.
Lesson 3: And aim for growth
Bennett and his team are looking for 20% to 20% annual growth in earnings or earnings before interest, taxes, depreciation and amortization (EBITDA). A good example is Cerence CRNC,
Derived from Nuance Communications NUAN,
in 2019, Cerence offers software that powers voice recognition in virtual assistants inside cars.
This is no small feat, given the noise of the road and the conversations in the background, as well as the multiple languages and dialects the company has to contend with. Cerence maintains strong relationships with all of the major automotive manufacturers around the world. The company’s profits rebound on tax provisions, but Adjusted EBITDA rose 34% in the first quarter to $ 39 million, and revenue rose 14% to $ 98.7 million.
Lesson 4: Find companies with a sustainable competitive advantages
Companies with lasting competitive advantages for Bennett include Upstart UPST,
which uses artificial intelligence (AI) to support a new approach to credit scores. Upstart deploys AI to assess non-traditional variables like education and employment. The system helps improve the credit quality of the loan portfolios of banks, which do not have the expertise to develop this type of AI. Banks can then approve more loans, often automatically, with lower loss rates.
Upstart began to support the personal loan industry. In March, it got into auto lending by purchasing Prodigy Software, which has a software platform for purchasing cars.
The use of AI in the lending industry will be a mega trend. It will therefore be important to continuously assess whether Upstart is retaining its advantage. This is another good lesson.
“The worst thing you can do is find a business that is losing its competitive edge,” Bennett says.
To track this, Bennett and his team are looking for clues like slowing growth, squeezing profit margins, or missed profit forecasts. They also discuss with customers and suppliers and follow trends in trade magazines.
Lesson 5: Check proven management
Following one of the ground rules developed by Matthew Weatherbie, Bennett enjoys being in companies that have “moved beyond the perils of early childhood.” This means that senior executives have already suffered bumps and bruises and learned from them.
One tip is to invest with seasoned managers who have a habit of saying “this is what we’re going to do” and then doing it. This is the case of the fertility aid company Progyny PGNY,
led by David Schlanger, whom Bennett has known from when Schlanger was CEO of WebMD, from 2013 to 2016.
Progyny helps employers provide fertility treatment benefits such as in vitro fertilization. It serves more than 180 employers in the United States in more than 30 industries. First-quarter revenue increased 51% to $ 122.1 million, and adjusted EBITDA jumped 158% to $ 17.3 million, although this partly reflects a rebound after one year 2020 low due to Covid-19.
Lesson 6: “Pleasantly boring” can be a thing of beauty
Many growth investors are flocking to the big names in tech and healthcare. To find businesses they overlook, look further.
“A lot of times you find more interesting businesses outside of those areas,” Bennett explains.
A good example is FirstService FSV,
in real estate management. While FirstService offers relatively boring services including banking, insurance, maintenance, security, and front desk staff, growth isn’t boring at all. Operating income rose 112% to $ 33.9 million in the first quarter, on sales growth of 12% to $ 711 million. The company uses its size to reduce the costs of these services, which allows it to attract new customers.
Another example is the waste disposal and recycling company Casella Waste Systems CWST,
which has rare landfills in the northeastern United States. The company is using its strong cash flow to buy out smaller operators. Adjusted EBITDA increased 16% in the first quarter to $ 38.8 million. Cash flow from operations increased 117% to $ 32.1 million.
“We are well positioned to generate additional acquisition growth over the remainder of the year as our acquisition pipeline remains strong,” said CEO John Casella.
According to the Weatherbie Method, this waste business is likely to add green to your wallet.
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no position in the stocks mentioned in this column. Brush suggested FB and TSLA in their stocks newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.