Portfolio Insights: Alger Weatherbie Specialized Growth Strategy


Josh Bennett (continued): So, number one is we believe that’s where the innovation is happening. Number two is, every time we have one of these companies that sort of graduates from our portfolio, we call these our graduates because they get above $15 billion. They’re still growing. They’re still doing well, but they graduate from our portfolio because we have an institutional-grade process which we have institutional- grade clients that we still invest in or invest for. They’re looking for us to be small cap growth investors. These companies become graduates and what ends up happening, in particular, in today’s market, you see the valuation gap between the smaller cap companies and the larger cap companies and we’re still finding great value companies. We’re finding companies that are coming in at attractive valuations. Now we do think, and this is important to our process, valuation and smaller cap growth investing, we call it smaller meaning, small or SMID, in small cap growth investing, we believe that valuation is 15%, maybe 20% of the puzzle. You’d not only want to, you need to get the fundamentals right in smaller cap growth investing, and then valuation follows over time. So, we’re incredibly focused on valuation, but it only comes once we know that the fundamentals are in place. So, on the valuation side, we always think about every one of our names in terms of an upside case, which is typically a multiple on an outyear estimate. Today, we’d be looking at like a 2021 estimate or outyear, we’d be putting a multiple on that for upside case because the market when it gets excited about names, it looks out further, and it puts a higher multiple on the outyear estimate. When the market gets spooked, what it does and our downside case would be built on a lower multiple in a near year estimate, and then based on industry dynamics, our knowledge and understanding, and experience with the management company, of the company, we would then weigh the upside versus downside and come up with the expected value. So, we have a robust system for evaluating valuation, but why is small cap interesting? The two reasons that come to mind right away are like I said, innovation, this is where it’s happening, and the fact that we believe the values are quite attractive right now for the new ideas, replacing the ideas that have really worked well for us.

Jackson: Follow up question would be, if anyone who looks at the fact sheet and the conversations we’re having, you’re seeing names that investors are typically aware of. Can you talk a little bit about, maybe some of the stocks having limited coverage or names that are outside the benchmark that really your team and your unique research process are uncovering them? Bennett: Absolutely. Yes, I mean, the advantage we have here is you take an experienced group of investors and I mean, our portfolio managers have an average of 20 years experience, our analysts are also very, very experienced. You take an experienced team of investors who are highly focused on finding Weatherbie growth stocks in a market that we believe is underfollowed, under-resourced, and what we mean by that is I’ve been doing this here for 13 years, I’ve been investing for 20, and little by little, what you’ve seen is that Wall Street research has changed. Wall Street research, because there’s less and less budget for it, they’ve made a lot of these Wall Street firms have chosen to focus on the larger cap names within their coverage universe because they feel like that’s where they get the most bang for the buck. So, what has suffered from a Wall Street research standpoint are many of the smaller companies that we’re looking at, it’s not unusual at all, Jeremy, for us to bring up a company into the portfolio, I’ll talk about how that happens, but by the time it’s getting into the portfolio, it may have one or two sell-side analysts who are actually covering the name. We’ll do an early call with them to kind of understand what they know about it, maybe take a look at how they’re modeling it, but it does not take long before we understand these companies well. Then over time, as companies pick up coverage of these names, as you know, that tends to help kind of prep up the valuation as these jewels that we find are discovered. In fact, not only are we in this kind of smaller cap space where there’s less resources, but even within smaller cap, everybody who thinks about kind of small cap growth investing where their mind automatically goes is health care and technology. Those are kind of the buckets that you’ve got to do, that’s the vast majority of the alpha that’s added by the portfolio.

Conference Call 4/10

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