100+% Gains For Certain Stock Picks From This Experienced Small Cap Portfolio Manager: Is There An Opportunity To Repeat This Performance In 2010?
November 30, 2009 - The Wall Street Transcript has just published TWST Investing Strategies Report offering a timely review of the Diversified Investments sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Mathieu Sirois is a Senior Portfolio Manager in U.S. Small-Cap Equities with Van Berkom and Associates Inc. He joined the company in May 2000. On July 1, 2006, he was appointed Portfolio Manager, U.S. Small-Cap Equities after being Senior Analyst, U.S. Small-Cap Equities. On April 1, 2007, he was appointed Senior Portfolio Manager, U.S. Small-Cap Equities.
He is responsible for all the investment decisions related to the U.S. Small-Cap Equity product and for managing the US Small Cap Equity Division. He is also responsible for conducting research on the broad US small-cap universe. He received a BAA degree from the Universite Laval and holds an MSc degree in Finance from the Ecole des Etudes Commerciales in Montreal. He also holds the CFA designation. Mr. Sirois owns 13% of VBA's common shares.
TWST: What are some of the examples of companies that you did buy during that period, September to March, when the market was at its bottom and opportunities were strongest?
Mr. Sirois: There are several examples, but one of them is called IDEX Corporation (IEX); we believe it's one of the highest quality industrial companies available in our universe. This one had been on our radar screen for some time, but the valuation wasn't appealing enough for us to commit to the investment and the stock had started to come off in a major way in the summer and fall months of 2008. So around October/November of last year, this is when we first committed to the investment.
This is a company that has dominant market positions in niche industrial markets; its products are typically very highly engineered and oftentimes customized, and the company enjoys some very solid competitive positions throughout its portfolio. It's well diversified across different verticals, across different geographies, and its management team has demonstrated its ability to generate very strong free cash flows, a very good return on capital, and the company has grown through a mix of organic growth and targeted acquisitions. We think it has a very sustainable model that has led and should continue to lead to long-term out-performance.
The stock had reached a level that we believe was significantly undervalued last fall in the high teens, so this is when we initiated the position thinking that the stock was worth between $25 and $30 and a year later now, the stock has come back to around $30 on what has proven to be very good performance from this company in a very difficult operating environment. They have continued to generate very strong free cash flows, they have been very proactive to take costs out, and they've also managed their working capital very tightly so that they've continued to enjoy a very strong balance sheet, a very strong financial profile, and they are incredibly well positioned we think for future success in the next several quarters. That's one example of that.
Another one would be IMS Health (RX). The company is a leading provider of analytics, data and information, as well as consulting services to the pharmaceutical and life sciences industries, and to government agencies around the world. The company has always enjoyed a very dominant market position. It is THE brand name in the industry in terms of data, analytics, information and consulting services to the life sciences and pharmaceutical industry.
The business has very strong competitive advantages, very strong barriers to entry, very significant free cash flows, and great returns on capital and margins. But as a result of very difficult market conditions in the pharmaceutical industry as well as the expected negative impact from the recession on its business, the stock reached all-time low multiples late last fall, and this is when we initiated a fairly large position in the company. This was a company that had been trading at much higher multiples in the past and we believed that it reached levels that made it incredibly undervalued.
The stock was trading between $11 and $12 when we initiated the position versus our estimate of the true value for the business that we determined to be at around $17, $18, so we thought that warranted a pretty significant investment on our end. We committed to the investment, and the company continued to report very solid free cash flows despite a very difficult operating environment, and recently they have announced that they're exploring different strategic alternatives. They've been approached by a couple of private equity firms and so the stock reacted very well to that news obviously (the company has since announced that it will indeed be sold to two private equity firms at $22). We think it's just another example of a high quality company that became severely undervalued last year.
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