By Michael Brush
It’s great to try to learn from high-profile investment masters such as Warren Buffett. But don’t make the mistake that we in the media make by focusing too much on Buffett and a few other legends.
Otherwise, you’ll miss out on key investing lessons from other pros with stellar records, especially those in the investment business in more recent years.
Consider Josh Bennett and his team at Alger Weatherbie Specialized Growth Fund /zigman2/quotes/205599262/realtime ALMAX -0.09% . Never heard of them? Let me bring you up to speed. Trust me, it will be worth your time. I share six key investing tactics, below.
But first, the numbers. This fund is up an annual average of 25.5% over the past five years. That means Bennett and his crew beat their Russell Mid Cap Growth index benchmark by 5.9 percentage points, annualized, during that time, according to Morningstar.
Bennett has worked at Weatherbie Capital since 2007. His shop was bought by Alger Associates in 2017. The fund has $1.6 billion in assets, and it carries a 1.27% fee.
Lesson 1: Stay loyal to your system
Bennett attributes key tactics, described here, to the “Weatherbie way,” developed by Matthew Weatherbie and his team in the mid-1990s. Why change, if they work?
“Stick to your knitting when a process is proven and time tested,” Bennett told me in an interview.
This sounds too simple to include, but never forget it. Many investors run into trouble because they succumb to what’s known in the fund business as style drift.
Lesson 2: Go small
Small-cap stocks are a great place for stock pickers for a simple reason: Many investors avoid this end of the market. It has little Wall Street analyst coverage. If there is, it’s by a junior analyst. (Same on the buy side.) That makes small-caps an area where good research can create an information advantage. You’re not likely to get that with a Facebook or Tesla /zigman2/quotes/203558040/lastsale TSLA +2.51% .
Bennett and his team like to get into companies before their market caps hit $2.5 billion — often in the $1 billion to $1.5 billion range. The average market cap at the fund is $4.9 billion, according to Morningstar, versus $19.5 billion for its mid-cap growth category and $23 billion for its benchmark index.
When researching small-cap companies, Bennett applies the following rules.
Lesson 3: And go for growth
Bennett and his team look for mid-teen to 20% percent annual growth in earnings or earnings before interest taxes and amortization (EBITDA). A good example is Cerence /zigman2/quotes/214095346/composite CRNC +0.48% . Spun out of Nuance Communications in 2019, Cerence offers software that powers speech recognition in virtual assistants inside cars.
This is no small task, given the road noise and background conversations — and the multiple languages and dialects the company has to deal with. Cerence has solid relationships with all the major automakers in the world. Earnings bounce around at this company because of provisions for taxes, but adjusted EBITDA grew 34% in the first quarter to $39 million, and revenue grew 14% to $98.7 million.