Active Currency: The “Forgotten” Alpha
March 12, 2019
Ward Sexton: In small cap, you have a plethora of names of a lot of companies, and they’re generally early in their growth cycle. So it’s not as proven, there’s more thinking about what this company could be in the future.
Corey Tobin: Both Apple and Amazon were considered small caps about 20 years ago or so, and today, they’re some of the biggest companies in the world.
Ward Sexton: Small cap has a number of inefficiencies. One of the efficiencies is just a time arbitrage. The company that can actually compound growth at a higher than expected rate, or more durably, then what the market that’s focused simple on near term prospects.
Corey Tobin: We’re willing to look beyond 90-day reporting increments, and more toward three-, four-, or five-year time frames when we’re trying to ascertain how large a company’s earnings stream can grow.
Ward Sexton: Another one is fallen quality growth. So growth is not linear. The reality is that almost every company stumbles. And if you’ve done your work ahead of time to understand how strong the competitive position is, how durable the business is, and when that blip happens, that stumble, and the stock reacts, you have the opportunity to step in and buy at very attractive prices. The last are undiscovered quality growth companies. These tend to be a little more unique to the smaller-cap spectrum. Companies that aren’t well covered by the street, maybe they don’t have much institutional ownership, and people haven’t been to the offices to visit these companies and understand what they’re doing, how they’re growing the business, how the business is changing.
Finding information in small cap can be different than larger-cap companies. Sometimes they aren’t covered by a sell-side analyst. It means that when we find something unique, perhaps it’s actually unique and special as opposed to something that everyone has already acknowledged.
Corey Tobin: With any investment decision, there’s numerous factors to consider, but I feel that there are three that are paramount. First, there needs to be a very large market opportunity. Second, the company has to provide a product or service that has a high value proposition to its clients. And third, the competitive barriers have to be very strong, and that we feel confident will stand the test of time. When these factors line up, it gives us the ability to look at the long-term horizon for a company and really try to ascertain the long-term earnings power. The extra time and effort we put into the front end gives us that confidence, which we believe helps us add alpha for our clients.
Filmed September 2018
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