Wasatch Small Cap Value Fund: Looking for Fallen Angels and Orphaned IPOs
Salt Lake City, UT (PRWEB) December 15, 2011
Jim Larkins is a value investor surrounded by growth investors. Most of my Wasatch colleagues try to own the highest quality small cap growth companies in the market. Given the volatile nature of small cap companies and the significant number of companies that stumble, our research team regularly presents a tremendous opportunity set for me as a value investor. There is a market inefficiency that exists when a growth stock becomes a value stock and we can exploit it.
I try to find great companies that hit a rough patch or a bump in the road. They become fallen angels for one reason or another, said Larkins who has worked on the $ 181 million (as of 12/6/11) Wasatch Small Cap Value Fund since its inception in 1997 and has managed it since 1999. Wasatch Small Cap Value Fund(WMCVX) invests primarily in small companies with market capitalizations of less than $ 2.5 billion at the time of purchase. Larkins looks for companies whose stocks he believes are undervalued but have significant potential for price appreciation.
Larkins also looks for opportunities in IPOs with good stories that have fallen off investors radar screens after the initial hype of the IPO. We look for good companies at a time when other investors are not paying attention. This frequently occurs within the first couple of quarters or even the first couple of years after going public. The Street moves on to the next deal and at the first sign of trouble, some really good companies get abandoned by the crowd.
In the following Q&A, Larkins discusses a few of the fallen angels and orphaned IPOs that he is following closely.
Q: How do you define a fallen angel?
Our definition of a fallen angel is a company that achieved success and then faces a crisis, regulation, or event that causes a near-term disruption to their business. We want exposure to great long-run growth names at times when no one else sees the opportunity. We look for long-run growth opportunities that have hit a bump in the roadnot the end of the road. Ours is a contrarian approach to exploit an inefficiency that happens regularly in the markets due to short-term challenges. Many of the best growth stories owned at Wasatch have spent time in the value fund after stumbles as they were on their road to greatness. .
Q: Give us some examples?
One of our favorites is the womens clothing retailer Chicos (CHS). Chicos was a Wall Street darling until about 4 years ago. They had a remarkable same store sales record that didnt miss, year after year. But then they over-expanded and struggled with inventory systems and technology that was not as good as people thought it was. The economy didnt help either, especially for their upscale, middle-aged client who saw the value of her 401k decline. Chicos named a new management team, invested in new systems, and improved their stores. Now customers have come back. The company has other positives with a new intimate apparel store called Soma and the recent purchase of online retailer Boston Proper, all thoughtful extensions of the companys expertise targeting upscale woman customers.
Skechers (SKX) is another example. The company is known for affordable family shoes, but the stock is depressed because of a foray into the toner shoe fad Skechers invented the Shape Up Shoe that ultimately burned out. They were caught with too much inventory and the stock tanked. The upside is the company was able to reposition itself as a legitimate athletic shoe provider. For example, theyve been able to offer an ultra-light-weight shoe at a time when demand is growing. They moved from a $ 30 to $ 40 price point up to shoes in the $ 60+ range. And they are able to use their great distribution and international presence to now leverage that reputation.
One last fallen angel Ill mention is Bridgepoint Education (BPI). The entire for-profit education sector was under pressure due to congressional investigations and new regulations related to student loan funding. Bridgepoint was launched by former Apollo executives to offer a lower price point for working adults seeking a college education. They modified their recruitment methods, implemented the new regulations and are now attracting new students and growing their base. They produce good profits and cash flow and are buying back shares.
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