Weatherbie Specialized Growth: A Focus on 50 Stocks
The following is a transcript of the Focus on 50 Stocks Podcast
BRAD NEUMAN:  Hello, I’m Brad Neuman, Investment Strategist at Alger.  And you’re listening to The Alger Podcast.  Today, I’m speaking with Josh Bennett, Senior Managing Director and Director of Research at Weatherbie Capital about his experience co-managing the Weatherbie Specialized Growth portfolio, Alger’s focused strategy in the small to mid-cap space.  At Alger, we believe focus strategies are appealing because they allow portfolio managers to allocate assets to their highest conviction positions.  Josh, thanks so much for joining me today.

JOSH BENNETT: My pleasure.  

BRAD: You manage Weatherbie Specialized Growth in a team process along with Matt Weatherbie and George Dai.  Has the portfolio always been a focused strategy?  That is, did it start with just 50 stocks?  Or did it evolve into that organically?

JOSH: So, if you go back to the history, Matt founded this firm back in the mid-90s, and he realized that the way he could add the most value in this small to midcap space was by focusing on 50 to 60 names.  And over time, what we realized is our top names tend to perform much better than kind of the mid-tier or certainly the bottom-tier names.  So we did a good job of not just identifying those 50 to 60 names - but really those top names where we were the most concentrated were adding the most value through time.

So, we took that data and we decided as a team that we were going to focus even more.  And now we’re at a hard 50.  Within those 50, we now take our sleeve approach to management.  So, Matt, George and I each run a sleeve and we use that sleeve approach to further concentrate.  And the way we do that is each of us tends to concentrate our assets in the best 40 of the 50 from each of our perspectives.  

So, what you end up with is a concentrated portfolio where the top ten names are over 40 percent of our assets, the top 15 names are over 50 percent of our assets. So we’re highly concentrated even within that, and yet we’re getting to that by three distinct PMs, focusing on the best 40 of the 50 and where the three overlap, now you have three supporting views on one name.  This is a top ten name.  And then we add a risk control, and we review those top names on a monthly basis at least, or when news comes up.  So it’s a pretty neat process.  It’s pretty unique.     

BRAD: And how do you manage turnover and rotation within the strategy?  

​JOSH: So we’re looking at names, I would say 350 that we’ll closely follow.  And then from those 350, typically we will see the names kind of pop up that we think are timely and ready to invest in these kind of Weatherbie growth stocks.  So that’s kind of how we’ll narrow down to the 50.  

And each analyst on the team – and realize that we have a team of six investment professionals – George and I are actually analysts as well as portfolio managers – each analyst is charged with coming up with multiple ideas.  But what we end up with is on a monthly basis, we might have one or two research meetings where we’re reviewing anywhere from two to four investment ideas.  These are in-depth conversations where we’ve reviewed the research report ahead of time, the analyst has sent out their model.  And at the end of that meeting, we come to a decision as a team on whether or not this is a Weatherbie 50 type stock.  And if it is, it becomes a Weatherbie 50, which leads to the next natural question: if this is a Weatherbie 50 stock, what’s going to come out of the fund?  

So, that forced constraint of always owning just 50 stocks, we think is a very healthy thing for the fund and our investment process, because we’re always going to own just 50 stocks.  Any time a great idea comes along, it doesn’t matter how good that idea is.  For it to get into the fund, something else has to come out.  So, we’re always refining and further refining the portfolio so it truly owns the best 50 names we can come up with.   

BRAD: Josh, what kind of criteria exactly do you look for in a Weatherbie 50 company?

JOSH: So, one thing unique about Weatherbie is that we have adhered to investment criteria.  Those investment criteria are number one, seasoning – and what we mean by that is that these companies are past the perils of infancy, meaning these are not newcomers to the market.  These are companies that have been around for long enough that have an established track record.  

Number two, we’re looking for growth.  We’re looking for double digit growth approaching high teens, 20 percent is what we’re really looking for.  

Number three, we’re looking for sustainable, competitive advantage.  And what we mean by that is we’re looking for a company that has something unique about it that serves as a moat around the business and ideally that moat is widening over time and not narrowing.  It’s dangerous in growth investing to find a company trading at a high multiple because usually they are, and if their competitive advantage is waning over time, the multiple compresses significantly through time.  Dangerous, dangerous for growth investors, so we’re looking for a company with that sustainable competitive advantage.  

We’re looking for fourthly, returns.  So we’re looking for a company that puts up strong returns on equity or returns on invested capital through time.  And again, ideally returns on invested capital that are greater than their cost of capital and growing through time, or companies that have the potential to do so.  

Fifth, we’re looking for companies that are high quality. And by quality we’re talking about strong balance sheets, strong free cash flow.  

And lastly, we’re looking for a company that has a management with a proven track record and a vested interest in the company.  We are always looking for a company where the management’s interests are aligned with us as investors.    

BRAD: Can you give me an example of a particular company that fits all of the criteria for you. 

JOSH: The one that comes to mind immediately is a company that functions in the transportation space.  So, this is a company that I followed for quite some time when they initially came public.  At Weatherbie, we love to find a mundane industry like transportation and this company came along and invested heavily in technology which gave them visibility across the entire space in terms of where capacity was and how good capacity was at delivering products on time and without damage.  And in addition, they had a particular niche in the last mile logistics, in what they call “white glove” service.  

For example, if you were to order a ping-pong table online, this company would likely be the company that delivers it to your home.  But they also would bring it into your basement and open up the box and set it up for you. That’s a different type of delivery service than a truck that gets a box from here to there. That’s what you call “white glove delivery service”.   


BRAD: Josh, I know you have a very selective process – both in your research – and in the team’s review of what makes it into the final portfolio.  What would you say is a typical “gestation” period from the time you discover a stock to the time the team agrees it should make it into the Weatherbie 50?

JOSH: It can vary quite a bit.  So, I can think of an example like the transportation company I was speaking about where I want to say it was probably a gestation period of probably two years, something like that.  Where, between the time where I first met them and then – you needed a lot of things to line up.  The economy, the macro economy needed to be at the right place where it was accelerating.  I needed to get comfortable with the business model.  The market cap of the company needed to fall within the range of what we look for, which is typically $350-400 million on the low end, up to two billion – would be our typical entry point.  
So, a lot of things needed to line up and it took about two years for all that to line up.  A lot of things can be moved pretty quickly when needed, but a lot needs to line up for it to get from first exposure to pitching to the team and in the fund.

But we can vary quite a bit, from a couple years to a matter of months.  And we know that someday it might be the right opportunity, and then suddenly a few things fall in place and we take action.  

BRAD: I know Weatherbie can be a competitive team.  You must take great pride when one of your ideas makes it into the 50. 
 
JOSH: I think one of the most exciting things in investing is when, as an analyst, as a sponsoring analyst of an idea, you get that name in the fund, that you convince the team that this is something that’s worthy to be one of the Weatherbie 50.  And absolutely, it’s exciting.  I think we are operating in one of the most dynamic sectors of the market in this small to mid-cap space and when we find a new idea and we get excited about it, you can hear it in our voice.  I mean we really feel like this is a company that could transform an industry and a management team with a proven track record of execution whose capable of actually doing this and pushing this model and strategy through. 

BRAD: Here’s a question that’s been on a lot of investors’ minds recently:  How do you manage volatility in your process?   
 
JOSH: We truly are bottom up stock pickers.  That being said, when you’re in that small to mid-cap growth space, there’s going to be volatility in the market and in fact, probably more volatility in our market.  What we find is these opportunities with volatility in the market can quite often be opportunistic times to add to the best of our positions.  We like to say we want to use periods of volatility to upgrade the quality of our portfolio. 

So, we think when volatility happens in the market, what we do is we go back to our original thesis on the company, we evaluate that thesis, we think hard about - has anything changed in terms of our core thesis, and if not, we’ll quite often do additional work, we’ll do additional calls, we’ll go deeper, we’ll go back to our model, we’ll revisit our estimates.  And if nothing has changed, we’re going to use that opportunity to add to those positions.  

But there are times where market volatility does mean it’s time to upgrade the quality of the overall portfolio and we will take advantage of those times to shift some assets from one name to another.  But it’s highly unlikely that with a rapid reaction in the market that we’re going change our decision.  It has to be something that the thesis was broken to begin with and then it may be an opportunity to get out.      

BRAD: Do you ever find yourself actually arguing with Matt or George?  My stock is better than your stock?  

JOSH: So without a doubt, we disagree, but it really is in a healthy way.  It’s a very healthy process that we come to.  It all starts with - we all have the same view of what a Weatherbie growth stock looks like and it comes from Matt’s foundation with the criteria for investing that we look for.  

That being said, when we talk about how our particular company might meet or not meet the criteria that we’re looking at, it’s rare that we find one that meets every single one of the criteria.  But we will have healthy debates about companies that meet this more or meet the criteria less.  And that’s a distinct advantage of the process, because we’re doing all that in a respectful, collegial way and we do it with a view toward “let’s get the best 50 stocks that we can in the portfolio”.  And then within that of best 50, we have the ability to own or not own this particular name.  

So, if Matt and George find a name and they love it and I don’t love it, but it becomes one of the Weatherbie 50, I have the flexibility to not own it in my sleeve.  It will still be owned in the fund, but I have the flexibility to concentrate on the best 40 or so of the 50 that I find.  

So no, we don’t argue, but we certainly have different perspectives and you will see the sleeve managed approach only works when you have three portfolio managers who have a similar bullseye, we know what the Weatherbie growth stock looks like, but we have the flexibility with full transparency to own or not own the names within the Weatherbie 50 and to concentrate in the best 40 or so of the 50 names.  And that’s what allows us to have that independence, flexibility, to act or not act when we want to, to add or trim to names, as long as the transparency is there and we fully communicate to people what we’re doing at any given time

BRAD: Josh, thanks so much for taking some time with us today. 

JOSH: Thanks.  Thank you for your time.

BRAD: And thank you for listening.  For more information on the Weatherbie Specialized Growth Strategy, please visit www.alger.com.

​Click here for more information on Weatherbie Specialized Growth Strategy.​​

The views expressed are the views of Fred Alger Management, Inc. as of April 2018. These views are subject to change at any time and should not be interpreted as a guarantee of the future performance of the markets, any security or any strategy managed by Fred Alger Management, Inc. These views should not be considered a recommendation to purchase or sell securities. Individual securities or industries/sectors mentioned, if any, should be considered in the context of an overall portfolio and therefore reference to them should not be construed as a recommendation or offer to purchase or sell securities. 

Risk Disclosures: Investing in the stock market involves gains and losses and may not be suitable for all investors. Growth stocks tend to be more volatile than other stocks as the prices of growth stocks tend to be higher in relation to their companies’ earnings and may be more sensitive to market, political and economic developments. There are additional risks when investing in an active investment strategy, such as increased short-term trading, additional transaction costs and potentially increased taxes that a shareholder may pay, which can lower the actual return on an investment.  Stocks of small- and mid-sized companies are subject to greater risk than stocks of larger, more established companies owing to such factors as limited liquidity, inexperienced management, and limited financial resources. The Portfolio may be more concentrated than other portfolios, so it may be more vulnerable to changes in the market value of a single issuer and may be more susceptible to risks associated with a single economic, political or regulatory occurrence than a fund that has a more diversified portfolio. Past performance is no guarantee of future results. Please visit www.alger.com for additional risk disclosures. 

Weatherbie Capital, LLC (“Weatherbie”), an affiliate of Fred Alger Management, Inc., invests in smaller cap U. S. growth companies that have enduring earnings, reasonable valuations and a distinct competitive advantage. Weatherbie invests in Foundation growth stocks and Opportunity growth stocks. Foundation growth stocks are companies demonstrating both strong earnings growth and high investment quality. Opportunity growth stocks are companies whose earnings may be temporarily depressed, but change is underway that can reaccelerate earnings.

Distributor: Fred Alger & Company, Incorporated. Member NYSE Euronext, SIPC. NOT FDIC INSURED. NOT BANK GUARANTEED. MAY LOSE VALUE.


Founded in 1964, Fred Alger Management provides investment advisory services to institutional and individual investors through traditional and alternative strategies in a variety of products, including separate accounts, mutual funds and privately offered investment vehicles. For more information, please visit www.alger.com.