It’s a typical busy day at theWeatherbie Capital office in Boston and George Dai, Ph.D., and Daniel Brazeau, CFA, are ready for the firm’s investment team meeting. Dan and George are proposing adding Chegg, Inc. to a list of potential investments for the firm’s Specialized Growth strategy. The two know they will be challenged. After all, the team has been concerned that Chegg’s legacy college textbook rental operation was too capital intensive and logistically challenging. It involved purchasing large volumes of books and costly opera tions, such as maintaining warehouses and managing the whole distribution system. Yet, George and Dan possess deep knowledge of Chegg after having held numerous meetings with the firm’s management, so they are well prepared for a lively meeting. Rigorous debates are key to the firm’s investment process. The team prides itself on evaluating every idea with “a neutral mind,”which means decisions are made based on facts and data, with minimal personal bias. This is easier said than done. Even George and Dan debated at length before switching their mindsets from a previously bear ish to now bullish view. Their bullish stance is based on extensive due dili gence including multiple management meetings and consulting with industry experts. In the process, George and Dan became excited by the progress Chegg had already made expanding into more profitable online education services and the future potential of Chegg Study, Chegg Tutoring, Chegg Math and Chegg Writing. As a result, they convinced the team to consider the company as a
potential long position. They then con ducted more research in the following months and finally were now ready to pitch the company as a potential port folio holding. Three Tranches As the meeting starts, George and Dan know the proposal will be subjected to a rigorous debate. To that end, they expect questions from the whole team, including MatthewWeatherbie, a 47-year industry veteran, and Joshua Bennett, CFA, who has 20 years of experience. The meetings are an important opportunity to build the Weatherbie 50, which is a group of 50 stocks that the team believes has high growth potential and reasonable valuations. Each portfolio manager builds a tranche from the Weatherbie
50 and determines his own weightings for individual positions. The combina tion of the three tranches is the Specialized Growth strategy, a “best ideas” focused portfolio of high con viction small- and mid-cap growth stocks. The stocks are selected based on the “Weatherbie Way,” which entails using a research-driven process to find companies with potential for strong earnings growth. At the time of the Chegg debate (which was prior to the novel coronavirus pandemic), this intensive process included team members traveling extensively to meet with management teams and conduct ing in-depth research and collaboration via telephone and email. With the pandemic, however, the teammem bers have relied heavily on conference and video calls to conduct research.
From left to right: H. George Dai, Ph.D., Matt Weatherbie, CFA, and Josh Bennett, CFA
During teammeetings, rigorous debates ensure that the team under stands and feels comfortable with all the upside and more importantly, the potential downside. “We all get along extremely well outside of the confer ence room and we respect each other professionally. But inside the confer ence room, it is a level playing field,” George explains. “We all want to leave a meeting with confidence that all key aspects of a company have been discussed and challenged.” Matt draws upon his extensive experi ence to search for any unforeseen weaknesses or strengths in an invest ment idea. As noted by Josh, “Matt will quite often say, ‘This company reminds me of another company.’ He will draw upon the comparison and his unique perspective to pick apart an idea.” Josh, for his part, brings intense questioning to meetings. His knack for fleshing out knowledge through questions started at an early age. “As a child, I would frequently ask my parents big questions and my parents would have to conduct research to find answers. Today, during meetings, one question can easily lead to 10 others. Sometimes, my questions may seem too deep or detail oriented, but I really want to get to the core of every invest ment idea.” George, meanwhile, tends to seek more data to develop investment proposals, which isn’t surprising. He
has a doctorate in organic chemistry and as a former pharmaceutical researcher, he has four U.S. patents under his name, so he is comfortable with the scientific process. During the Chegg discussion, the entire team, including Matt and Josh, peppers Dan and George with questions and initially challenges each other on whether Chegg meets the firm’s strict investment criteria. George and Dan, however, argue that over the last few years Chegg has been growing its online education, homework assistance and tutoring services. It has made enough progress with those initiatives and has demonstrated early signs of market leadership in these niches. Additionally, Chegg has outsourced its textbook rental operations, which has freed up capital for the firm’s more profitable online services. Dan and George also maintain that Chegg already has considerable brand recog nition among students and educators, and is therefore well positioned to expand its offering with online services. After extensive discussions and debates, the team is convinced by the strong, fact-based arguments from Dan and George and adds Chegg to the Weatherbie 50. Over the next few quarters, Dan and George’s thesis continues to play out successfully as predicted. Fast forward a few years and the investment team remains excited
about Chegg. The company is provid ing critical educational services that help the educational community in the midst of the Covid-19 pandemic, which has caused schools to cancel classes and close facilities. As a result, students who are taking online classes may turn to Chegg for various online services. After becoming familiar with Chegg Study, Chegg Tutoring and other offerings, new student subscribers may continue to use the services even after the pandemic subsides. Time-Tested Collaboration Matt says the collaboration illustrates the strength of an investment process that benefits from teamwork without being burdened by cumbersome and bureaucratic hurdles. It sounds simple, but for the process to work, each team member must provide unique perspec tives on investment ideas while also embracing “the Weatherbie Way.” The process has been further refined over the years. “We have been managing this portfolio together for more than a decade,” Matt explains. “And the whole team has been inculcated in the Weatherbie Way.”
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RISK DISCLOSURE: Investing in the stock market involves risks, and may not be suitable for all investors. Growth stocks tend to be more volatile than other stocks as their prices tend to be higher in relation to their companies’earnings and may be more sensitive to market, political, and economic developments.A significant portion of assets will be invested in technology and healthcare companies, which may be significantly affected by competition, innovation, regulation, and product obsolescence, and may be more volatile than the securities of other companies. Investing in companies of small and medium capitalizations involve the risk that such issuers may have limited product lines or financial resources, lack management depth, or have limited liquidity.Assets may be focused in a small number of holdings, making them susceptible to risks associated with a single economic, polit- ical or regulatory event than a more diversified portfolio. Foreign securities involve special risks including currency fluctuations, less liquidity, inefficient trading, political instability, and increased volatility. The mention of specific securities does not constitute a recommendation byWeatherbie Capital, LLC or its affiliate Fred Alger Management, LLC. As of March 31, 2020, Chegg Inc. represented 5.94% of Alger Weatherbie Specialized Growth Fund assets and 5.92% of Alger Weatherbie Specialized Growth strategy assets. Holdings are subject to change. Before investing, carefully consider a Fund’s investment objective, risks, charges and expenses. For a prospectus or a summary prospectus containing this and other information about a Fund, call (800) 992-3863, visit www.alger.com, or consult your finan- cial advisor. Read it carefully before investing. Distributor: Fred Alger & Company, Incorporated. Member NYSE Euronext, SIPC. NOT FDIC INSURED. NOT BANK GUARANTEED. MAY LOSE VALUE.