Portfolio Insights: Alger Weatherbie Specialized Growth Strategy
Josh Bennett (continued): What’s unique about the Weatherbie team, and this has been the case since Matt founded the firm back in the 1990s, is we do health care, we do technology, and we think we do those groups incredibly well and yes, they are drivers to performance, but we have our kind of little secret sauce, and we think our secret sauce is that when we take the market and we pick it apart and look for opportunities, we don’t think in terms of getting sectors. We think in terms of dynamic growth areas. Dynamic growth areas, sometimes GICS sectors but we assign our analysts to at least two of these dynamic growth areas. There’s one dynamic growth area we call diversified business services. Frankly, that’s a catchall for a lot of companies that don’t naturally fit kind of in the normal categories of other companies. Many of our biggest winners came from this diversified business services segment. So, companies like LKQ, where we were one of the early holders in this junkyard company, that was applying technology and process to an old-style industry. We used to own Waste Connections and today we own Casella Waste which are truly, waste management companies, but they’re applying better process, better management, and some technology to an age-old industry of collecting trash on the side of the street and then putting that trash in a landfill. So, we find company after company. One of the best examples probably is this company called FirstService Corporation that I mentioned earlier. FirstService is a real estate services company, so incredibly boring if I can just be blunt about that. I like to say it’s pleasantly boring. The reason is that, essentially if you think about a property owner of say a high-rise building, a residential building in New York, or let’s take a gated community out in Arizona, and you have a homeowner’s association that runs it. The property owner or the homeowner’s association has to hire a manager to manage that property. What do they do? Well, yes, they do take care of the grass and they take care of the plumbing, and they paint the outside and the roofing, but ,they also deal with all the contracts anytime somebody buys into the condo association, and leaves the condo association. They also help these companies or these properties find the best deals on utilities. The best deals on insurance. The best banking deals to take
on people’s deposits and manage that. They have 24/7 service. So, it sounds incredibly simple, but what I’ll tell you is they’re anywhere, depending on the market, two to five times larger than their nearest competitor, so they have a scale advantage. They can benchmark relative to the other competitors with similar properties in those surrounding markets, 24/7 coverage using technology to get back to people quickly, and now let me tell you the great part. Over 20 years, this FirstService Corporation has grown its revenues at a 19% compound annual growth rate, two-thirds of that growth has been organic growth. So, this is a strong growth company that’s kind of in this unknown area of residential property management. They generate an incredible amount of free cash flow which they then use to go and buy their nearest competitor in each of these regional markets. So, the scale advantage keeps growing and growing. So, this is a good example, because you asked earlier, Sean, about this concept we have of foundation growth stocks versus opportunity growth stocks. FirstService Corporation is a good example of a foundation growth stock. Highly predictable, experienced management with a strong ownership stake, the growth is there and the growth is predictable. We’ve known these companies for a long time, at least two-thirds of our portfolio is always going to be in foundation growth stocks. Flip over to opportunity growth stocks, up to one-third can be the opportunity growth stocks, which I can also talk about. Jacobus: I just got a question emailed into me, and I just want to know, about this rotation we’ve seen in the market, you talked about how a lot of smaller growth funds, heavy tech, heavy health care which the Weatherbie team does great, but with these more mundane things that might not be in those sectors, your strategy has held up exceptionally well, it’s even thrived even more in this rotation. So, maybe if you could just touch base a little bit on this rotation we’ve seen in the market, why we’re seeing it, and how you guys have held up so well, and how maybe these more mundane, pleasantly boring names that you talked about has held up so exceptionally well where we’ve seen maybe a little pullback in the traditional growth sectors?
Conference Call 5/10
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