Small Cap Investing in Volatile Markets

TRANSCRIPT

And industrial companies, we own very, very little. They’re going to be impacted in a huge way, I think. So, I think we are very well positioned that way. Consumer is very tricky. One of our top holdings is Wingstop. They sell chicken wings, but that means the bulk of their business is takeout. They are ramping up on digital and delivery. It’s actually being part of the solution, whereas if you own any other restaurants, you’re going to be clearly impacted. So, in consumer space, we are very selective.

AZ: As Brad pointed out, we’ve seen a lot in our individual companies; there are a lot of CEOs buying; which is clearly positive. I always appreciate that, but that’s not the only factor. I take it seriously, but it’s not like I’m jumping to buy just because a CEO bought. But at least it’s sentiment in a sense that they believe in their business and we also, of course, ask if company’s going to exercise buyback programs. The one thing we don’t want is companies to borrow money to buyback shares. We want them to conserve cash, which they know my sense of how important cash is important for them. So, I’m advising themnot to make big acquisitions if they needmore cash. And then too, cash is king for companies. As long as they have more cash then it will help themover the long term. Speaker Question : I was wondering if after the market correction, if you’re looking at sectors you normally would not being looking at? But due to valuation, it looks so appealing to you? AZ: Me and my team like to stay with our own competencies so we are not going to invest in utilities. I’d rather have cash. I don’t sector rotate. On an absolute basis, I feel good about bouncing back when we get through this crisis. Speaker Question: I think we would all agree that earnings for the 1st quarter and 2nd quarter will be significantly down. At what point do you see things starting to turn? And I know it’s hard to pin it down, but at what point do you see earnings starting to turn, which might drive the markets back in an upward position? AZ: Well, let me answer that first and then I’m sure Brad will add. For us, it’s really company-specific because this strategy is always about stock selection. Our forte is really individual companies. Of course, as a portfolio manager, I think about companies in a holistic way, whether they serve markets that’s diversified enough and the correlation with each other is not very strong. And also in terms of risk considerations. But not all companies’ earnings are going to go down.

In a recession, everything goes down. The key is to go down less.

Speaker Question : In terms of the overall portfolio structure, how many names are in the portfolio?What is your cash position right now?

AZ: We currently have 49 names. Generally, I’m keeping cash from 5% to 10%.

Speaker Question: What will be the process for you to allocate some of that cash for opportunities?

AZ: We stress test our portfolio holdings a lot. We’ve been talking to every single company. It’s been very helpful because no matter how well we know a company, it’s very important to get their current thinking. We ask a lot of questions toadjust our assumptions because everything has changed. And in terms of short term and intermediate term, we focus a lot on bull/base/bear case scenarios. Now, we’re moving more towards uber-bear. Uber-bear assumptions are much lower than before. Not theworld is coming to an end, but factored in, for example, a 30 to 60-day shutdown and maybe more. I feel the key is to have the ammunition and also be well prepared. So, we’re going through this in a very rapid and intense way. Speaker Question: What are your thoughts on some of the companies announcing buybacks at some of these depressed prices?