Brian Bythrow // Portfolio Manager // Wasatch Micro Cap Value (VAMVX)

Comments & Outlook

The stock market is at a high and housing prices are rising, but the real economy doesn’t really seem to be doing much better. We’ve seen an increasing amount of government regulation, no real wage increases, and there’s a big mismatch between job openings and the workers available to fill them.

While companies are doing well despite all this, there are some very real structural problems in our economy. And so we doubt the Federal Reserve will be able to end QE [quantitative easing] soon.

Investment Strategy

We try to find undiscovered growth stocks with little analyst coverage and market capitalizations of less than $300 million. They tend to have cheap valuations, and if we’re right, they’re doing something special. We call this “capturing earnings growth,” and if that happens, then we typically see more analysts and investors taking an interest and driving up the price.

Because of already low expectations, it’s pretty rare that we get slaughtered in a stock, and this is proven by our 10-year history. If everything works perfectly, we start exiting a name when it hits a market cap of about $1.5 billion.

Portfolio Picks

We bought Caesarstone Sdot- Yam (NSDQ: CSTE), a maker of quartz countertops, during its IPO last year when nobody wanted it. It fit our criteria for cheap growth, although it’s cyclical. It’s taking market share away from granite and other styles of countertops, plus it’s benefiting from the housing market recovery.

Another one is BOFI Holding (NSDQ: BOFI), which is an Internet bank that just came out of obscurity. They make jumbo-mortgage loans requiring big down payments (45 percent to 50 percent down), mainly to self-employed people. While this sounds a little scary, given the big down payment, this type of buyer isn’t going to just walk away. We’ve owned BOFI for a number of years, and it weathered the credit cycle amazingly well.

We also like The Chef’s Warehouse (NSDQ: CHEF), a distributor of specialty foods to high-end small restaurants. SYSCO (NYSE: SYY) is the only other national distributor, but its focus is on chains and ordinary kinds of food. I also like CHEF because distributor stocks have gained more than twice as much as the S&P 500 during the past 20 years.

Greg Heywood, CFA // Manager // Delaware Focus Global Growth Fund (DGGAX)

Comments & Outlook

Our focus is on individual companies first and foremost, instead of chasing short-term shifts in economic data or market sentiment. Since we have a long-term investment horizon, we often try to take advantage of short-term mispricing. Given Europe’s severe volatility over the past several years, we have found attractive values there. Recently, we were about 40 percent invested across Europe and about 50 percent in the US.

Investment strategy

We focus on the cash economics of a business rather than traditional valuation metrics, such as reported earnings or revenues. And we seek out companies with strong business models and management teams, as well as defendable competitive positions. We believe these “all weather” characteristics allow for strong performance in a variety of market and economic cycles. Our investment horizon is three to five years.

Portfolio picks

Edenred (Paris: EDEN) is a French multinational whose stock trades on the Paris Stock Exchange. It specializes in employee-benefits management for things like meals and public transit, acting as a go-between for employers and employees in a large number of countries including the U.S.

What’s unique about EDEN is that it generates a high amount of free cash flow. With the exception of IT spending, EDEN has very low capital requirements, since it’s paid by its clients before it renders benefits. So the more the firm grows, the more free cash flow it generates. Therefore, the returns on this business are very high.

BM&F Bovespa (Brazil: BVMF3) is listed on Brazil’s São Paulo Exchange and it actually runs that exchange, both its equity and its futures trading. BM&F Bovespa makes money on each stock and futures contract trade on Brazil’s dominant exchange. So as Brazil’s capital markets deepen, the company stands to grow its franchises considerably.

The derivatives side of the business will be driven by more participants, more products, and higher liquidity. On the equity side, what has been a fixed-income dominated market is steadily giving way to greater ownership of equities, another plus for BM&F Bovespa.

BM&F Bovespa has little competition, high incremental margins, and it pays out virtually all its earnings as dividends.