Creating a thesis for each stock holding
Their portfolio maintenance and sell discipline use the same three parts as their fundamental research process: “When valuation is high, operating performance is above expectations, and sentiment reflects positive earnings estimate revisions or price momentum, we are generally reducing positions,” says Tinucci.
When an investment is made, they document the thesis. It summarizes what they believe will happen, what it would take to believe they are wrong, and how that translates into ROIC and valuation. They then track the thesis over time, updating their viewpoint as incremental information becomes available. When the thesis has played out or is no longer valid, they sell the company.
Risks of small cap stocks
“One reason to like small companies is that they have a large growth runway,” says Tinucci, “but fast growth can create growing pains.” Small cap stocks may also face less scrutiny than large cap companies. “Newer companies in the market often do not receive the same level of audit oversight as the larger established companies.”
Small companies tend to be more concentrated and less diversified. “Small stocks are very often newer and less proven, so that adds some business risk,” explains Finn. Another challenge with small caps is that the universe is constantly changing. “It’s a very dynamic asset class, with some stocks graduating to the mid cap sector while newer companies are coming in.”
Small cap stocks may be more volatile than larger companies, although Finn explains, “I don’t always see that as a problem. I see it more as an opportunity. I believe small cap is an asset class where active management can add value.”
Sectors of interest
The Fund seeks to maintain diversification across all sectors, with weighting similar to its Lipper peer group (Lipper Small-Cap Core Funds). But there are certain sectors the team believes offer more attractive opportunities than others.
Currently, the Fund has strong positions in several key areas:
Among the Fund’s top holdings is Triumph Bank (TBK), a regional bank that caters to the trucking industry. “Triumph offers a payment platform used by shippers and freight brokers to process, settle and manage carrier payments across all modes of transportation,” says Finn. “They also offer factoring, which allows truckers to get paid days sooner than shipping companies would typically pay them.”
Another top holding is Raven Industries (RAVN), which operates in several sectors. “A large part of Raven’s business involves manufacturing composite films for the oil and gas industry, which gives our fund some exposure to the energy sector,” says Tinucci. While the Energy sector has recently suffered due to the decline in global travel, Tinucci points out that once travel returns to normal levels, the demand should rebound. Raven is also a leader in the precision agriculture market, including applications for tractors that provide GPS assistance and automation of seed and fertilizer application. “While the agriculture business is cyclical,” says Finn, “Raven has been increasing its penetration in that business.”
Other top holdings include:
- Manpower (MAN), a leader in providing companies with temporary and contract workers. “When the economy goes down, temp workers tend to be the first to go, but as the economy rebounds, the first workers to return are often temp workers,” says Finn. Manpower has a strong presence in France where temp staffing is particularly popular.
- QuinStreet (QNST), which focuses on modernization of outdated business systems and processes in online marketing, mostly in the insurance sector. It is a leader in customer lead generation and operates multiple fully integrated online sites with access to most carriers, enabling users to receive binding quotes and purchase insurance online.
- Agilysys (AGYS), which offers technology to help the hospitality industry manage contactless solutions for guest engagement, such as reservations, check-in and table management.
- Air Lease (AL), which focuses on leasing newer, energy-efficient aircraft. As air travel picks up and demand grows, the company could benefit if the airlines prefer to lease rather than buy new aircraft in order to allocate more funds to paying off the sizable debt they’ve incurred during the pandemic.