Quick Take: Dennison Veru dislikes companies that constantly turn to the stock and bond markets for funding. Instead, he prefers those that generate enough cash for their daily operations.
The GE Funds:Small Cap Value Fund/A (GASCX) has been shunning telecommunications companies because they are capital intensive, says Veru, a member of the team that manages the portfolio. Avoiding that sector, which has been bruised in recent years, helped the performance of the fund, says Veru, who goes by "Dan."
In addition to businesses that don't have to sell equity or debt securities to keep going, Veru looks for small firms that dominate their industry or niche and generate strong free cash flow. The fund, as its name implies, focuses on undervalued stocks.
GE Small-Cap Value lost 15.5% this year through September, while the average small-cap value fund was off 16.4%. For the three-year period ended in September, the $46-million portfolio gained 15.8% annualized, versus 5.9% for its peers.
The Full Interview:
Dan Veru will not dip his toe into a company unless management lets him get a foot in its door. Having access to top executives, key personnel, and facilities is critical for him.
"There are a lot of companies that choose to not interact very much with Wall Street, and that's fine, that's more of a style thing," says Veru. "But they won't find a home in our portfolio."
While Veru listens to what corporate officials say about their enterprises, he prefers those that big brokerage houses are silent on. In part, that's because these issues can move up when mainstream analysts begin tracking and recommending them.
In addition, Veru, a co-investment officer at Palisade Capital Management in Ft. Lee, N.J., says he primarily relies on his own analysis, as well as data provided by independent researchers since it gives him a "more unbiased viewpoint" than research from firms that may have investment banking ties to companies.
Once a stock has cleared the initial barrier, Veru tries to identify small-cap companies that don't rely heavily on the capital markets for funding. What's more, he favors those that lead their industry or niche because this can give them pricing power.
In assessing a business's performance, Veru looks first for strong cash and free cash flow. He thinks this is a more reliable indicator of financial health than earnings, which are for him a secondary consideration. The stocks in his portfolio are increasing profits by about 17%-18% per year on average, he says.
While his holdings are growing a bit faster than those in the Russell 2000 index, they are slightly cheaper, according to the value-oriented Veru. The fund's stocks are trading at about 15 times forward-looking earnings, he says.
