Robert Gardiner, manager of the Wasatch Micro-Cap
(closed to new investors) and co-manager of the
Wasatch Small-Cap Value Fund, notes that there are
about 10,000 publicly traded companies, most of which
are in the small- to micro-cap universe. He mentions
that many of these are fast-growing, undiscovered companies.
In recent years, the rage among Wall Street and
investors has been to buy stock in growth-related
technology companies. Because of this, the shares of many
companies that have been classified as value stocks have
been largely ignored. Recently, many of the value-related
companies have been starting to perk up. The Wasatch
Small-Cap Value Fund is up an impressive 26 percent
year-to-date.
When selecting stocks for his micro-cap fund, Gardiner
describes his methodology with the acronym
ABGC -- America's Best Growth Companies. His management
team visits all the companies they own and prefers to
own businesses where management has a large position
in the company. "We also like to own companies that have
a sustainable competitive advantage," Gardiner says. "We
want to find companies that have something to hang their
hat on, like a competitive product, a large market share,
high barriers for entry in their markets, a patent and so
forth. . . We also look for at least 15 percent earnings
growth."
Another one of Gardiner's investment criteria is to
invest in companies that are relatively undiscovered and
have a reasonable price. That conservative investing
philosophy has helped the Wasatch Micro-Cap Fund avoid
investing in the dot-com names. So far this year, the
Wasatch Micro-Cap Fund has returned an impressive 30
percent, versus the Nasdaq's negative return.
One company that is a favorite in the Wasatch Micro-Cap
Fund is CorVel (CRVL 27). The company provides
managed-care services and primarily helps other
businesses manage worker compensation claims. Gardiner
comments, "With a strong economy, worker compensation
claims are going up. CorVel has been investing in
technology in order to lower the cost to manage these
compensation claims. The company has a fantastic track
record and has grown earnings-per-share (EPS) by 20
percent a year. We think they will experience a bit
of an EPS acceleration here due to the new technology
they're bringing on and with the aging population trend,
which will work in CorVel's favor. Their stock trades
at a very reasonable price and is not very well
followed by the street. The company has aggressively
repurchased its own shares and it's a name we really
like."
Another top holding in the fund is ICU Medical
(ICUI 21 1/2), which makes needleless connectors
used in medical IV tubing sets. The company has been
growing earnings in the 25 percent area, yet its stock
has recently come down from the $30 range. Gardiner
explains that the company's third quarter tends to be
somewhat difficult. In the last couple of years, shares
of ICU Medical were usually weak in September and
October in light of seasonally weak orders and
traditionally rebounded after the third quarter.
Gardiner adds, "So, here is a 25 percent grower,
historically, which sells for 16 times earnings. It
is particularly timely because the stock is down on
what we believe are not fundamental reasons."
One technology name Gardiner particularly favors is
PSi Technologies (PSIT 13 7/8), an independent
assembly and test service provider to semiconductor
manufacturers. He says, "The real story is that there
is a move within the semiconductor industry to
outsource backend packaging and testing for power
semiconductors. Only about 10 percent is outsourced
today and analysts estimate that it will increase to
20 to 30 percent." Gardiner notes that PSi has
recently entered into a partnership with ON
Semiconductor to add a third manufacturing facility.
PSi's partnership with ON Semiconductor is "not in
the numbers" and could provide some upside in next
years earnings.
Charles River Associates (CRAI 13 1/2) is an
interesting company whose stock is well off its
52-week high of $36 7/8. CRAI specializes in expert
witness work for law firms and is a play on the
increase of legal litigation. The company is often
involved in high-stakes matters such as
multi-billion-dollar mergers and acquisitions.
The company was an expert witness for the government
in the Microsoft antitrust case. Shares of CRAI trade
at about 10 times this year's projected earnings
estimate. Gardiner mentions that earnings growth
has slowed somewhat to a 10 to 15 percent clip but
that it will accelerate going forward.
One undiscovered holding in the Wasatch Micro-Cap
Fund is OrthAlliance (ORAL 6 1/4), which is
essentially a roll-up of orthodontists. "It is a
fantastic business and they are making a lot of
money. . . We don't see too much on the horizon
competitively that could change that," Gardiner
says. Shares of one of the larger orthodontic
companies, Orthodontic Centers of America, have
more than doubled since January, while shares of
OrthAlliance remained stagnant. Gardiner believes
the only reason OrthAlliance's stock has not moved
is because it is undiscovered.
In the Wasatch Small-Cap Value Fund, another
company Gardiner is high on is World Acceptance
(WRLD 5 1/4), which is engaged in the small-loan
consumer finance business. The company trades at
less than six times earnings, while growing
earnings in excess of 10 percent. "World Acceptance
is a company we really like on the value side,"
Gardiner comments.
Gardiner notes that the managers of many mutual
funds with impressive track records tend to leave
for higher-paying positions at other funds. He
credits his impressive track record to very low
employee turnover at his firm. "Our company has
very little turnover when compared to other
mutual funds. If you look at the track record of
both our Micro-Cap and the Small-Cap Value Fund,
we have done very well compared to our peer group.
You can have confidence in our track record because
our assets are managed by the same people and we
are making the right moves to preserve performance
into the future," he says. |
