Portfolio Insights: Alger Weatherbie Specialized Growth Strategy

TRANSCRIPT

Josh Bennett (continued): So, something like high 60s, 69%, 70% turnover on a dollar basis about half of that on a name basis. So, all we need to do is we need to find maybe 10 to 15 kinds of new names per year. We’re excited for some normalcy in 2021 and a normal growth environment would be welcome to our entire team. Jacobus: You had mentioned that your process at Weatherbie Capital has not changed. You guys will not go chase something when there’s a shift in the market. Could you just maybe illustrate that no matter what kind of market conditions we go through, how you stick to your name and stick to your process and don’t deviate from that? Bennett: Yes, what has not changed and will not change, Sean, is what we look for in the Weatherbie growth stocks. So, we have six growth stock criteria that are literally unchanged since Matt founded the firm back in the mid-1990s. What does change, I’ll talk about this a bit, is kind of how we find these companies, but what we look for is unchanged, and that’s first of all, we’re looking for real growth. So we’re not looking for a kind of GARP (growth at a reasonable price), these are not GARP-y. We’re looking for real growth, high teens, 20% plus. Number two, we’re looking for a company that over time, can generate real returns, ROIC (return on invested capital) is what we tend to look at. We tend to look at incremental ROIC and we compare that to the weighted average cost of capital over time. We’re looking for companies that are going to be or are already real value creators showing a positive trend in return on invested capital. Number three, balance sheet and cash flow. We look at those two together because we’re not opposed to companies that carry some debt as long as they have the free cash flow, if they could pay down that debt over time. So, those are three more quantitative factors. On the softer side, on the more qualitative side, what we’re looking for is we’re looking for companies that have some seasoning, and what we mean by that is we’re not VC (venture capital) investors, we’re not going to be the first ones in, we want companies that are past the perils of infancy, is the language that Matt

Weatherbie taught us early in our careers. Number two, management matters. We really believe that management matters fundamentally. We’re looking for companies that are either still founder-led and therefore, the founder still has a significant stake in the business, or if it’s new management that’s come in, which can sometimes be an excellent catalyst for the company, we want management that has incentives tied to the very factors that I talked about, organic growth, not acquired growth, return on invested capital, improving the balance sheet. Finally, I kind of mentioned this a little bit earlier, but I always save this one for last, because most important to me is – and to the team, we drive this through the team is a sustainable competitive advantage. You can use quant screens, you can use black boxes to identify companies that have the high growth metrics, that have the ROIC and so forth, but what you can’t do without the fundamental, bottom up fundamental analyses, is understand how sustainable is the moat around the business. In growth stock investing, that’s incredibly important because a great company is going to expand that moat over time, the competitive advantage is going to grow. I mentioned FirstService Corporation, for example, getting better and better and actually extending its scale advantage over time, that company is going to surpass everyone’s expectations and get a higher multiple from the market over time. Those six criteria have not changed. What does change is our ability to use new and fresh tools to identify those companies, so we’re looking at companies and we run very quickly get through, 60, 70, 80, 100 company tools for example, that are using AI (artificial intelligence) and ML (machine learning) to track transcripts and look for keywords so we can transcripts and look for keywords that we’re looking for, and key trends are related words and concepts..

Conference Call 8/10