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Though
Micro Cap sector has more
than 4,000 stocks, the sector
receives very little investors'
attention. Stocks in this
sector have higher volatility
in price, have lesser scrutiny
of the analysts, and are generally
not closely followed by investors.
The disciplined investor with
an analytical eye for growth
can generate better return
in the portfolio but one has
to be prepared to withstand
the volatility in returns.
Driven by earnings growth
and strong business fundamentals,
Mr. Carl Wilk has found an
investing approach to consistent
returns.
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Q:
Why
invest in micro-cap stocks?
A:
Investors with a disciplined
approach who are searching
for companies with growing
earnings…and are prepared
to do the research to find
these stocks…are likely to
be rewarded for their work.
Historically, the sector has
experienced higher volatility
than others, but it has also
delivered higher returns.
However, we do not invest
in biotech stocks and deep-value
or turnaround situations.
There are approximately 3,000
names in this sector of which
200 to 250 of them qualify
for our investment screens
to watch. We focus primarily
on companies that are generating
earnings, as our philosophy
is that earnings drive the
price appreciation of the
stocks. And, importantly,
we want to find these companies
early on in the price appreciation
cycle.
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Q:
How
do you find these stocks?
A:
We seek to invest in companies
that are trading at a 20%
or more discount to their
long-term earnings growth
rate. Our investment discipline
is to select these stocks
one at a time. We do not start
with any sector or economic
biases. We are interested
in stocks whose market-cap
valuations range from $50
million to $300 million. We
pay a lot of attention to
the reported earnings of a
company.
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Q:
Why
are you looking to buy the
stock of these companies at
a discount?
A:
We invest in companies with
a certain amount of discount
so that we have downside protection.
Companies that build consistent
earnings track records generally
experience expansion in their
price-to-earnings ratio. Our
job is to discover these companies
before other investors discover
them. Investing in this sector
also means embracing higher
volatility and greater likelihood
of surprises. We seek to avoid
these downturns and volatility
when we buy at a discount.
We are also looking for companies
with strong balance sheets
and cash flows that allow
for the funding of future
growth.
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Q:
Do
you pay closer attention to
the management teams?
A:
Micro-cap companies generally
have thin management. We are
looking for a management team
that has experience in growing
businesses and earnings. Depth
in management is important
to us because it signals broad
experience, financial control,
and the industry knowledge
needed to manage a firm's
growth in revenue and earnings.
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Q:
What
is your sell discipline?
A:
Our sell decisions are based
on four criteria; if a stock
meets one of these, we may
sell it. For example, if a
company's stock is priced
at twice to its earnings growth
rate, we will sell it. At
such a high price, we believe
that the stock is likely to
be susceptible to significant
downward pressure. If a company's
market value exceeds $600
million, we sell the stock.
We want to remain true to
our investment discipline,
so we do not want the fund
to begin having holdings that
are in the small- and mid-cap
sectors. If a company's fundamentals
change, such as the loss of
its largest customer, management
problems, or it makes gross
or operating margins revisions,
we sell the stock. If the
stock holding grows to more
than 2% of the fund's assets,
we sell the stock; we do not
want one stock dictating the
fund's returns.
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Q:
What
is your research process?
A:
Investing in this sector requires
a disciplined approach in
finding and evaluating companies.
Very little research is available
in this sector that one can
rely on. Our approach is to
discover names through our
research process that are
driven by earnings. We discover
70% of the names that we invest
in using this method. We start
with the reported earnings
and then apply traditional
fundamental research to the
company business model.
We discover
15% of our names through those
that are suggested to us by
research boutiques. Very few
research companies are active
in this sector, and it is
also not very widely followed
by a large group of investors.
The rest of the fund's names
we discover through quantitative
research.
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Q:
How
many stocks do you have in
the portfolio?
A:
Typically we hold between
60 and 80 stocks; currently
we have 74 stocks in the portfolio.
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Q:
How
do you deal with lack of trading
liquidity in these stocks?
A:
We prefer to hold stocks that
have at least an average daily
trading volume of 30,000 shares.
The management ownership of
stocks is also important to
us. In addition, we look at
the other shareholders in
the company to make sure that
if we decide to sell stocks
in the company we will have
enough market for them.
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Q:
Does
it have any impact on your
portfolio turnover ratio?
A:
Our portfolio turnover is
driven by market volatility
or a change in fundamentals.
If the market runs up 40%
or more in any sector or in
any quarter, then we like
to sell the stocks in that
sector or during that quarter
to reduce sector and security
risk associated with the increase
in valuations. When the fundamentals
in stocks change, we are likely
to sell them because we believe
that there will be more problems
to follow. Historically, we
have averaged portfolio turnover
of between 120% and 130%.
We try to keep the process
of buying and selling as tax-efficient
as possible to minimize the
capital gains distribution.
| about:
Carl Wilk
Carl
Wilk joined NorthPointe
Capital, a subsidiary
of Gartmore Group, in
2002 as portfolio manager
for micro-, small- and
mid-cap equity growth
funds. Since that time,
he has managed, in addition
to other funds, the
Gartmore Micro-Cap Equity
Fund.
Prior
to joining Gartmore,
Mr. Wilk served as senior
portfolio manager and
partner at Munder Capital
Management, which he
joined in 1995. He was
the manager of the Munder
MicroCap Fund and the
Munder Small Company
Focus Fund and co-manager
of the Munder Small
Company Growth Fund.
Prior
to joining Munder, he
was a senior equity
analyst at Woodbridge
Capital Management.
There he performed analysis,
primarily in the technology
and health care sectors,
for Woodbridge's small-company
growth funds for employee
benefit clients, personal
trust accounts and sub-advised
funds. Mr. Wilk was
also an investment officer
at Manufacturers Bank,
NA from 1986 to 1992.
He
holds a B.S. in finance
and an M.B.A. from Wayne
State University and
is a Certified Financial
Planner. |
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Q:
How
do you gain research advantage
in this sector? Do you find
that visiting the management
at companies adds value to
your research process?
A:
We find the majority
of the companies that we invest
in through their reported
earnings and the fundamental
work of our research team
of three analysts. We do not
visit management, but we go
to conferences. We find that
visiting investor conferences
is very productive. We can
meet with more than 200 companies
in three days. We not only
hear from companies, we also
hear from their competitors
and the majority of other
companies in the industry.
This way we gain industry
and company perspective. Management
visits has not proven to be
the best use of our time.
We do not
employ a sector view when
we are researching a company;
we use a bottom-up research
approach that we conduct one
company at a time. I started
out as a tech and healthcare
analyst. Typically, analysts
have a background in retail
media and the telecom area,
and each one has specific
knowledge. We, however, pride
ourselves in being generalists
and we search for a company
based on the fundamentals
rather than the macroeconomic
picture. We do not start with
the idea that we like a specific
sector and then search for
a company in that sector.
We start with reported earnings
and then we look for the company
that meets our fundamental
criteria.
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Q:
Are
you required to follow or
track any index?
A:
We look at the Wilshire
Micro Cap Index as one that
is closet to our fund; however,
we are not benchmark sensitive
and we do not mimic the index.
Our philosophy is to find
the best companies, and our
selection process is not based
on the allocation or weights
in the index. For example,
the index has biotech companies,
but we do not hold them in
fund have biotech companies
because these companies do
not have earnings.
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Q:
Let's
discuss some of your fund's
holdings? Why did you buy
them and why you still hold
them?
A:
SunOpta Inc. is one
of our recent holdings. The
company is a leader in producing
soymilk concentrate and oat
fiber. The company's business
focuses on the health and
organic segments of the market,
which are growing rapidly.
The company has been adding
manufacturing capacity and,
of late, management has started
to focus on opportunities
for food distribution in the
United States and Canada.
The company recently began
generating profits.
CyberOptics
Corp. is one of my fund's
top 10 holdings. The company
plays a critical role in manufacturing
electronic consumer gadgets,
in addition to the manufacture
of testing equipment and optical
sensors that are sold to Flextronics
and other Asian contract manufacturers.
The stock is trading at a
price-to-earnings multiple
of 14, and the company has
no debt on the balance sheet.
We believe that electronic
gadgets, such as iPod from
Apple and flat screen monitors
and TVs, will be increasingly
popular, which is going to
generate consistent earnings
growth. Even though the company's
testing equipment is a small
niche, the market is big enough
to allow the firm to prosper.
Radyne
ComStream Inc. is another
fund holding. The company
is active in the ground-based
portion of satellite communications
systems and cable networks
to transmit data, voice and
video-over-Internet. The company's
products are used in applications
for telephone, data, video
and audio broadcast communications,
as well as private and corporate
data networks, Internet applications,
and digital television for
cable and network broadcast.
The company will benefit from
the current trend in the TV
signals to be broadcast in
the HDTV format. There are
some concerns that the company
may experience quarterly volatility
in booking orders. The stock
is trading at a price-to-earnings
ratio of 15, based on next
year's earnings. The micro-cap
companies such as Radyne have
volatile earnings, especially
in the tech area, and we are
concerned about that, though
the company's fundamentals
are still solid.
Lowrance
Electronics, Inc. is another
of our top 10 holdings. This
family-run business manufactures
SONAR and GPS applications.
The company's products are
generally known as depth and
fish finders, as well as terrain
marking and mapping devices.
The management has been successful
in expanding the business
into the GPS-based application
in the last two years. The
Company's SONARs are principally
used by sports fishermen for
detecting the presence of
fish and by boaters as navigational
and safety devices. Its GPS
receivers are used in a variety
of marine and non-marine applications,
including aviation, automotive,
hunting, hiking and backpacking.
The company has doubled its
earnings in the past year
and could repeat this performance;
it is still selling at 10
times earnings. On the downside,
the stock is not highly liquid
and there is no analyst coverage
on the company.
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Q:
When
do you sell stocks in your
holdings?
A:
Changes in company earnings,
the business environment and
the management drive us to
sell stocks. If any of these
changes significantly affects
earnings growth, we sell.
We have one or two companies
that miss their earnings target
every quarter, and that is
why the fund is diversified
into about 70 stocks in order
to reduce individual stock
risk.
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