NCM Insights - Alex Sasso - NCM Small Cap Funds

January 15, 2020

1) How do you manage the portfolios in terms of the different investment styles, value and growth?

In small caps, one can blend a combination of both value and growth style investing. At NCM, we use quantitative analysis as part of the investment process. Some of the metrics we look at are low trailing price earnings, which is a good indicator of future stock price direction and is a value attribute. We also look at current price earnings as another value attribute as well as price to cash flow multiples. Cash generation is a better predictor of the health of the company versus earnings generation, as we like companies with low price to cash flow. We also look at return on equity, which is what the net income of the company is relative to its equity. We prefer the return on equity to be higher than the price to earnings multiple.

On the growth side, we look at earnings momentum as a very important attribute as well as estimate revisions. We prefer companies that are increasing estimates. In a perfect world you want 20 to 30 companies that beat estimates in a portfolio, which is very difficult to do. If the company beats estimates in one quarter there is a higher mathematical probability that they are going to do it again the following quarter.

What is really nice with small caps is that I can get strong value and growth attributes, which is something that is rare in large cap Canada, U.S., or Global companies. It is difficult to buy companies growing at the metrics we like to see for the prices we like to pay in large cap asset classes.

2) Is the discrepancy between earnings growth and valuations still pronounced?

What we find is that as the companies grow and more analysts cover them, the story gets out there. Lululemon is a perfect example of this. The company is not just covered by Canadian analysts, it’s covered by analysts around the world. At the same time its revenues have grown, its store count increased, and earnings have grown. Everything has fallen into place for the company and as a result its multiples have increased. More
analyst coverage typically means more investors are aware of the company.

ETFs factor into the equation as well. As a company grows eventually it will get included in an ETF. Those inflows create automatic buying, which further pushes up multiples.

3) What catalysts do you see for small caps in 2020?

We own a few companies in the portfolios that are perpetual acquires. They tend to buy at lower than market multiples. Further, synergies push down the cost of acquisition making the merger accretive to shareholders. What I think we are going to see is a few takeovers coming in 2020 or companies going private. If some high profile takeovers happen, it will recast valuations for many small caps.

I believe earnings growth will be a strong catalyst in 2020. I think small cap growth will be at a faster pace than large caps. The combination of earnings growth and the potential for acquisitions may have a positive impact on Canadian small caps in 2020.

4) How do you filter through companies for the portfolios in Canada?

The small cap team reads pretty much everything that the analyst community sends out. We are in conference season right now and have a lot scheduled. In these conferences, we typically see 10 to 15 companies in a day and have further breakout sessions where we sit down with the management teams and really look under the hood to do a deep dive.

In February and March, we have earnings season which tends to be a great catalyst to either remove or add a company. We have active models of over 100 companies. These models, plus a close relationship with most of the entrepreneurs help us understand the opportunities these companies have in front of them.

Click here to learn more about our NCM small cap funds.

For More Information:

Alex SassoChief Executive Officer & Portfolio Manager

After graduating from the University of Windsor with a B.A. in Economics and Finance, Alex took a job with a leading retail and institutional investment firm in 1991. In 2004, Alex left to join NCM Asset Management Ltd (formerly Hesperian Capital…

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