Opinion: This fund manager has outperformed and is ready to share his system with you

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It’s great to try to learn from high profile investment masters like Warren Buffett. But don’t make the mistake we make in the media by focusing too much on Buffett and a few other legends.

Otherwise, you will miss out on important investment lessons from other distinguished professionals, especially those who have been in the investment business for the past several years.

Consider Josh Bennett and his team at the Alger Weatherbie Specialized Growth Fund ALMAX.
+ 0.22%.
Never heard of them? Let me update you. Trust me it will be well worth your time. I share six key investment tactics below.

But first the numbers. This fund has grown by an annual average of 25.5% over the past five years. That means Bennett and his crew outperformed their benchmark for the Russell Mid Cap Growth Index by 5.9 percentage points on an annualized basis during that time, according to Morningstar.

Bennett has been with Weatherbie Capital since 2007. His business was bought by Alger Associates in 2017. The fund has $ 1.6 billion in net worth and a 1.27% fee.

Lesson 1: stay true to your system

Bennett attributes the key tactics described here to the “Weatherbie Way,” developed by Matthew Weatherbie and his team in the mid-1990s. Why switch when they work?

“Stick to knitting when a process is proven and proven,” Bennett told me in an interview.

It sounds too easy to include, but never forget it. Many investors get into trouble because they succumb to the so-called style drift in the fund business.

Lesson 2: Go Small

Small-cap stocks are a great place for stock pickers for one simple reason: Many investors avoid this end of the market. It has little Wall Street analyst coverage. If so, then from a junior analyst. (Same on the buy side.) That makes small caps an area where good research can create an information edge. You probably won’t get that with a Facebook FB,
+ 0.06%
or Tesla TSLA,
-2.03%.

Bennett and his team enjoy getting into companies before their market cap reaches $ 2.5 billion – often in the $ 1 billion to $ 1.5 billion range. The fund’s average market cap is $ 4.9 billion, according to Morningstar, up from $ 19.5 billion for the mid-cap growth category and $ 23 billion for the benchmark index.

When researching small-cap companies, Bennett uses the following rules.

Lesson 3: And strive for growth

Bennett and his team aim for earnings or earnings before interest taxes and amortization (EBITDA) growth of mid to 20 percent annually. A good example is Cerence CRNC,
-6.75%.
Spun off from Nuance Communications NUAN,
-0.22%
In 2019, Cerence will offer software that supports speech recognition in virtual assistants in cars.

Given the street noise and background conversations, as well as the many languages ​​and dialects the company has to deal with, this is no easy task. Cerence has strong relationships with all of the world’s major automakers. This company’s profits are increasing due to tax provisions, but adjusted EBITDA increased 34% to $ 39 million and revenue increased 14% to $ 98.7 million in the first quarter.

Lesson 4: Look for companies with sustainable competitive advantagesS.

Companies that have sustained competitive advantages for Bennett include Upstart UPST,
-0.49%,
used artificial intelligence (AI) to support a new approach to credit scores. Upstart uses AI to evaluate non-traditional variables like education and employment. The system helps improve the credit quality of loan books at banks that do not have the expertise to develop this type of AI. Banks can then, often automatically, approve more loans with lower loss rates.

Upstart started helping the personal loan business. Back in March, the company entered the auto loan business by purchasing Prodigy Software, which has a software platform for car purchases.

The use of AI in the lending business will be a megatrend. It is therefore important to continuously assess whether Upstart is maintaining its lead. This is another good lesson.

“The worst thing you can do is find a company that is losing its competitive edge,” says Bennett.

To track this, Bennett and his team look for clues like a slowdown in growth, a decrease in profit margins, or missed profit forecasts. You also talk to customers and suppliers and follow trends in trade magazines.

Lesson 5: Check for Good Management

Following one of the ground rules developed by Matthew Weatherbie, Bennett enjoys working in companies “past the dangers of childhood.” That means the top managers have already suffered bumps and bruises and have learned from them.

A tip here is to invest with experienced managers who already say, “We will do this,” and then do it. That is the case with the fertility promotion company Progyny PGNY.
-12.60%,
Led by David Schlanger, whom Bennett knows from his time as Schlanger as CEO of WebMD from 2013-2016.

Progyny helps employers offer fertility treatment benefits such as in vitro fertilization. It serves over 180 employers in the United States in more than 30 industries. Revenue in the first quarter rose 51% to $ 122.1 million and Adjusted EBITDA rose 158% to $ 17.3 million, although this was in part a recovery from a poor 2020 due to Covid-19 reflected.

Lesson 6: “Pleasantly boring” can be beautiful

Lots of growth investors flock to hot technology and health stocks. To find companies they overlook, look into the distance.

“Often times you can find more interesting stores outside of these areas,” says Bennett.

A good example is FirstService FSV,
-0.52%
in real estate management. Although FirstService offers relatively boring services like banking, insurance, maintenance, security, and front desk personnel, the growth is by no means boring. Operating income rose 112% to $ 33.9 million for the first quarter, while revenue grew 12% to $ 711 million. The company is taking advantage of its size to reduce the cost of these services, thereby attracting new customers.

Another example is the disposal and recycling company Casella Waste Systems CWST,
+ 0.13%,
that has scarce landfills in the northeastern United States. The company is using its solid cash flow to buy up smaller operators. Adjusted EBITDA rose 16% to $ 38.8 million in the first quarter. Operating cash flow increased 117% to $ 32.1 million.

“We are well positioned to drive further acquisition growth over the remainder of the year as our acquisition pipeline remains robust,” said CEO John Casella.

Weatherbie fashion, this garbage company is likely to add some green to your portfolio.

Michael Brush is a columnist for MarketWatch. At the time of publication, he had no positions in any of the stocks mentioned in this column. Brush suggested FB and TSLA in its stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.


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