Finding Quality Growth

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All of our work is governed by the “Weatherbie way”, which essentially is finding quality companies ahead of our peers. Quality and growth are key aspects of our philosophy. While finding growth is relatively easy, finding quality growth is a different thing. Being able to find quality growth companies ahead of our peers is our source of outperformance. How do you define the Weatherbie way? Could you be more specific? The Weatherbie way is a three-by-three approach, which includes three quantitative and three qualitative metrics. The quantitative metrics are earnings growth of at least 20%, return on invested capital that’s bigger than the cost of capital and a strong balance sheet supportive of the business model. The three qualitative metrics are management with a strong track record and shareholder-aligned interest, being a seasoned company and, most importantly, having a sustainable and enlarging competitive moat. We establish the quality of management through face-to-face interviews, where we build understanding of the management’s capabilities in stewarding our clients’ capital. An enduring sustainable competitive advantage should ideally be growing over time. We look for companies with some strong experience and track record of success, because those qualities give us confidence when analyzing the company’s future growth and profitability. These six metrics form the Weatherbie way. The foundation stocks, which typically make up more than two thirds of the portfolio, are companies that would generally check all six boxes. The opportunity stocks sometimes may not meet all the criteria, but we believe that they will mature into steady growers over time. Do you invest in companies that aren’t profitable yet? For some companies we are reasonably confident to project their future earnings. Some recent IPOs don’t have earnings yet, but can present growth opportunities. If we have confidence in the business model, even if a company is not profitable, we can still invest on the basis of the future sustained profitability. We mostly invest in profitable companies, but there are some stocks in the portfolio that don’t have earnings yet. What are the key steps of your investment process? First, we combine bottom-up selection with macro analysis. We are a bottom-up fundamental shop, but we do understand the macro picture as well. The second step is analyzing the companies, both quantitatively and qualitatively. When we invest in a company, we think of ourselves as owners. We try to understand every aspect of the business, including its market, customers, suppliers, competitors and the value that the business brings to the table. We also consider the starting point, the budgeting process, the size of the investment needed, the expected growth, the employees, the culture, etc. We do a lot of qualitative thinking. After the extensive research process, we need to be able to quantify the prospects of these investments. We do detailed proprietary modeling of every line of the P&L, including revenues, cost of goods sold, operating expenses and operating income. We examine how much cash the company generates and how much money it loses, how much money it has on the balance sheet, and how many years of cash it has left. How is the research team organized? We are a research-driven organization. The research process starts with identifying opportunities. Then we dig deep to confirm an opportunity or reject it. When we look for ideas, we divide the market into dynamic growth areas. Such areas can be consumer or health care, but also diversified business services, where we do a lot of research. Each analyst works on at least two of those dynamic growth areas and each dynamic growth area has at least two analysts on it. That is a redundancy built into the process, which we hope makes sure that we don’t miss any great growth ideas. Overall, we are specialists in the dynamic growth areas that we follow. Our investable universe consists of about 1,500 U.S. stocks. We apply the six criteria to this universe and each analyst identifies interesting ideas within that group, even if they don’t meet all of our criteria, to get to 350-400 closely followed stocks. We only initiate positions in companies with a market cap range of $300 million to $2.5 billion at the time of entry.

Joshua D. Bennett, CFA Senior Managing Director of Research

Joshua Bennett is Senior Managing Director and Director of Research at Weatherbie Capital, LLC. Josh is a Portfolio Manager on theAlger Weatherbie Specialized Growth Fund, the Alger Dynamic Opportunities Fund, the Weatherbie Specialized Growth Strategy and the Weatherbie Long/Short Strategy. Josh also has research responsibilities in theconsumer, industrials, technologyanddiversified business services areas. Josh joined Weatherbie Capital in July 2007 and has 19 years of investment experience. Prior to joining Weatherbie, Josh was an Equity Research Analyst at MFS Investment Management in Boston where he focused on the Aerospace/Defense and Transportation sectors. Josh received his M.B.A. from the Tuck School of Business at Dartmouth (Edward Tuck Scholar with Distinction) and he earned a B.A. in Economics (Summa Cum Laude) from Wheaton College (IL). Josh is a CFA charterholder and is a member of both the CFA Society Boston and the CFA Institute.

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