The document discusses small cap outperformance and Ashford Capital Management's approach to capturing the small cap effect through investing in "criteria companies". It describes how Ashford focuses on small companies with strong fundamentals like balance sheets, earnings, and business models. One example is given of a biopharmaceutical company Ashford invested in that was later acquired at a significant premium. The summary emphasizes Ashford's research-intensive process of evaluating management teams and identifying small cap growth opportunities before they are discovered by other investors.
Ashford Capital Management Small Cap Criteria White PaperCliff Short III
This “Small Cap Effect” has been analyzed, deliberated, and dissected for decades, and subsequent studies have proven that, with some caveats, the out performance of small capitalization stocks on both a risk-adjusted and absolute basis is real.
During the last 15 years more than $800 billion dollars has been contributed to index funds. At Selective we believe there are many limitations to these products and don't truly capture the heart of investing - business ownership. To learn more go through the presentation. If you would like more content like this visit us at www.selectivewm.com or contact us at info@selectivewm.com
Phil Ordway on Building Products Companies - Best Ideas 2016valueconferences
Opportunities in Building Products: Armstrong (NYSE: AWI) and USG (NYSE: USG) operate within a profitable niche market for ceiling products, and both are interesting companies. They have ~50% and ~30% market share, respectively, in a very stable, high-ROIC business with exemplary pricing power and relatively little competition. Using AWI’s numbers, volumes are still well below their 2005/06 peak and their plants are running at ~70% utilization, but they’ve been able to raise prices consistently and revenues and margins are considerably higher compared to the prior cyclical peak. This cycle may be a little different -- namely, it has been much slower to recover than many expected, and we may not attain those 2005/06 levels anytime soon -- but therein lies the potential opportunity, as some investors may have lost patience. AWI is also undergoing a period of significant change. Its smaller, less profitable flooring segment is likely to be spun off in 2016, and the remaining ceilings business will then be under the full control of a new CEO (who is the current president of that division and has achieved good results).
Ashford Capital Management Small Cap Criteria White PaperCliff Short III
This “Small Cap Effect” has been analyzed, deliberated, and dissected for decades, and subsequent studies have proven that, with some caveats, the out performance of small capitalization stocks on both a risk-adjusted and absolute basis is real.
During the last 15 years more than $800 billion dollars has been contributed to index funds. At Selective we believe there are many limitations to these products and don't truly capture the heart of investing - business ownership. To learn more go through the presentation. If you would like more content like this visit us at www.selectivewm.com or contact us at info@selectivewm.com
Phil Ordway on Building Products Companies - Best Ideas 2016valueconferences
Opportunities in Building Products: Armstrong (NYSE: AWI) and USG (NYSE: USG) operate within a profitable niche market for ceiling products, and both are interesting companies. They have ~50% and ~30% market share, respectively, in a very stable, high-ROIC business with exemplary pricing power and relatively little competition. Using AWI’s numbers, volumes are still well below their 2005/06 peak and their plants are running at ~70% utilization, but they’ve been able to raise prices consistently and revenues and margins are considerably higher compared to the prior cyclical peak. This cycle may be a little different -- namely, it has been much slower to recover than many expected, and we may not attain those 2005/06 levels anytime soon -- but therein lies the potential opportunity, as some investors may have lost patience. AWI is also undergoing a period of significant change. Its smaller, less profitable flooring segment is likely to be spun off in 2016, and the remaining ceilings business will then be under the full control of a new CEO (who is the current president of that division and has achieved good results).
Mercer Capital's Value Matters™ | Issue 4 2020Mercer Capital
Mercer Capital's Value Matters™, published 6 times per year, addresses gift & estate tax, ESOP, buy-sell agreement, and transaction advisory topics of interest to estate planners and other professional advisors to business.
Rod Smith • National Planning Corporation
- What is your investment style? by Ron Rowland
- Solid, if unspectacular, full-year 2014 GDP—even as Q4 disappoints
- What volatility derivatives can tell you about the stock market by Lawrence G. McMillan
- Promoting a partnership approach (Brian Glaze & Larry Ware, LPL Financial)
We answer all your questions regarding small-cap investing in this free downloadable ebook.
- What is small cap investing?
- What are the characteristics of small cap investing?
- How do I choose a small cap manager?
- Why invest in a managed portfolio?
- What does market timing have to do with anything?
- What investment style REALLY works for small caps?
Mercer Capital's Value Matters™ | Issue 4 2020Mercer Capital
Mercer Capital's Value Matters™, published 6 times per year, addresses gift & estate tax, ESOP, buy-sell agreement, and transaction advisory topics of interest to estate planners and other professional advisors to business.
Rod Smith • National Planning Corporation
- What is your investment style? by Ron Rowland
- Solid, if unspectacular, full-year 2014 GDP—even as Q4 disappoints
- What volatility derivatives can tell you about the stock market by Lawrence G. McMillan
- Promoting a partnership approach (Brian Glaze & Larry Ware, LPL Financial)
We answer all your questions regarding small-cap investing in this free downloadable ebook.
- What is small cap investing?
- What are the characteristics of small cap investing?
- How do I choose a small cap manager?
- Why invest in a managed portfolio?
- What does market timing have to do with anything?
- What investment style REALLY works for small caps?
La Represa de Aguada Blanca representa para Arequipa el embalse más importante dentro del sistema de represas de la cuenca alta del río Chili, por su doble función que desempeñaba, como embalse de almacenamiento y como embalse de regulación.
Gestion del talento humano en las organizacionesVictor Adrian
Rol Estratégico
Son aquellas desarrolladas en la gestión de personal y que tienen un impacto organizacional de largo plazo y de elevada importancia en el desempeño de la función de personal.
Securities Firms and Investment Banks.docxjeffreye3
Securities Firms and Investment Banks
Securities Firms and Investment Banks (IBs)
Investment banks (IBs) help corporations and governments raise capital through debt and equity security issues in the primary market
Underwriting is assisting in issuing new securities
IBs also advise on mergers and acquisitions (M&As) and corporate restructuring
Securities firms assist in the trading of securities in secondary markets
Broker-dealers assist in the trading of existing securities
2
Investment bankers assist borrowers in raising capital in debt and equity markets and provide advice about mergers and acquisitions, corporate restructuring and general assistance in finance. Bankers also provide many creative over the counter derivative products. Securities firms provide brokerage and market making services. The investment banking and securities industries are complementary and many firms provide a broad range of services. Some specialized entities with advantages in certain market niches remain less diversified. The industry underwent tremendous consolidation in the last decade due to increasing scale and scope economies and the need for greater capital. The face of the industry was changed forever during the financial crisis of 2007-2008 with forced buyouts of Merrill-Lynch and Bear-Stearns, failure of Lehman Brothers and Goldman-Sachs and Morgan Stanley becoming commercial banks. Nevertheless, working for many of these firms is often considered the penultimate finance career, with prestige and remuneration to match. With industry profits down, firms on the Street are having a difficult time maintaining their large salaries and bonuses. A very significant portion of profits are paid out in the form of remuneration to executives. The chapter presents an overview of the size of the industry and the general strategies of the participants, major activities, primary assets and liabilities on the balance sheet, recent in the news events concerning breaches of ethics and the trend toward globalization.
Size, Structure and Composition of Industry
The size of the industry is usually measured by the equity capital of firms rather than total asset size
Equity capital in the industry in 2015 was $235 billion
The number of firms in the industry changed due to economies of scale and scope, losses with the economy, scandals at some firms, and regulations that allowed both inter- and intra-industry mergers
5,248 firms in 1980
9,515 firms in 1987
6,016 firms in 2006
4,115 firms in 2016
As with commercial banks, consolidation has largely occurred through mergers and acquisitions
.
Securities Firms and Investment Banks.docxkenjordan97598
Securities Firms and Investment Banks
Securities Firms and Investment Banks (IBs)
Investment banks (IBs) help corporations and governments raise capital through debt and equity security issues in the primary market
Underwriting is assisting in issuing new securities
IBs also advise on mergers and acquisitions (M&As) and corporate restructuring
Securities firms assist in the trading of securities in secondary markets
Broker-dealers assist in the trading of existing securities
2
Investment bankers assist borrowers in raising capital in debt and equity markets and provide advice about mergers and acquisitions, corporate restructuring and general assistance in finance. Bankers also provide many creative over the counter derivative products. Securities firms provide brokerage and market making services. The investment banking and securities industries are complementary and many firms provide a broad range of services. Some specialized entities with advantages in certain market niches remain less diversified. The industry underwent tremendous consolidation in the last decade due to increasing scale and scope economies and the need for greater capital. The face of the industry was changed forever during the financial crisis of 2007-2008 with forced buyouts of Merrill-Lynch and Bear-Stearns, failure of Lehman Brothers and Goldman-Sachs and Morgan Stanley becoming commercial banks. Nevertheless, working for many of these firms is often considered the penultimate finance career, with prestige and remuneration to match. With industry profits down, firms on the Street are having a difficult time maintaining their large salaries and bonuses. A very significant portion of profits are paid out in the form of remuneration to executives. The chapter presents an overview of the size of the industry and the general strategies of the participants, major activities, primary assets and liabilities on the balance sheet, recent in the news events concerning breaches of ethics and the trend toward globalization.
Size, Structure and Composition of Industry
The size of the industry is usually measured by the equity capital of firms rather than total asset size
Equity capital in the industry in 2015 was $235 billion
The number of firms in the industry changed due to economies of scale and scope, losses with the economy, scandals at some firms, and regulations that allowed both inter- and intra-industry mergers
5,248 firms in 1980
9,515 firms in 1987
6,016 firms in 2006
4,115 firms in 2016
As with commercial banks, consolidation has largely occurred through mergers and acquisitions
.
America is in the grips of a speculative frenzy. Investment .docxgreg1eden90113
A
merica is in the grips of a speculative frenzy. Investment bankers, private investment firms, and even a few dozen recently graduated
MBAs labelling themselves “searchers” are calling, emailing, wining, and dining small business owners. Their goal is to translate prosaic
small businesses into the poetry of private equity.
The great postcrisis private equity gold rush is on, fueled by cheap debt and enthusiastic investors. A lawn care chain might get half a dozen calls
and emails a week from business brokers and “searchers.” A regional bank auctioning off a business with $15 million in profits might pitch two
hundred prospects, receive fifty letters of intent, and take twelve separate private equity firms to management meetings, ending in a sale price
which the majority of bidders considers crazy. And the greatest prize of all—a software company—could sell for many multiples of revenue,
regardless of profitability.
As with the mortgage-backed securities bubble, experts are the promoters and pioneers of an “asset class” that they claim will offer high returns
with low risk, guided by the sage wisdom of elite managers. The legendary leader of Yale University’s endowment, David Swensen, has gone so far
as to call private equity a “superior form of capitalism.”
The experts agree with Swensen. A recent survey of institutional investors found that 49 percent expect private equity (PE) to outperform the
public equity market by a whopping 4 percent per year or more. Another 45 percent believe PE will outperform by 2–4 percent per year. Only 6
percent think returns will be comparable. The survey did not even bother to ask if investors thought PE might underperform. This is particularly
shocking given that data from Cambridge Associates shows that private equity returns have lagged the Russell 2000 index by 1 percent and the
S&P 500 by 1.5 percent per year over the past five years.
This consensus has led institutional investors to flood private markets with capital, about $200 billion per year of new commitments. The result is
soaring prices for private companies of all shapes and sizes. Just before the financial crisis, in 2007, the average purchase price for a PE deal was
8.9x EBITDA (earnings before interest, taxes, depreciation, and amortization—a commonly used measure of cash profitability). Deal prices reached
8.9x again in 2013 and are now up to nearly 11x EBITDA.
But asset prices are going up everywhere. What makes private equity dangerous is the use of debt—and the use of phony accounting to conceal the
riskiness of these leveraged bets. The average PE deal is 65 percent debt financed, and whereas the valuations of public equities are determined by
transparent, liquid public markets, PE firms determine the valuations of their own portfolio companies. Unsurprisingly, they report far lower
volatility than public markets.
This appraisal accounting also encourages lenders to take risks. After the financial crisis, the Fede.
The last decade has been a challenge for many investors, especially those investing for the long term and retirement. Given declines in global stock markets, many investors have seen little to no real growth in their portfolios over this period. This Wealth Guide explains why investors’ portfolios may underperform in both bear and bull markets and incur substantial costs in the process. It also details the impact this chronic underperformance can have on achieving long-term financial goals.
For more free wealth management guides on portfolio performance and for expert consultation, visit SolidRockWealth.com.
Henry Kravis at KKR recently said that he wished that he had a dollar for each time anybody said that private equity is dead. I Think Ben Carlson should send him a buck.
DealMarket Digest Issue137 - 17 April 2014Urs Haeusler
SEE WHATS NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 137 - April 17th, 2014:
- Cravings for Direct Co-Investment Still Strong
- Narrow Niches and Big Returns
- Australian PE Backed IPOs Outperform
- The Traits of Family Wealth Managers That Make Money…. and Lose it
- CEOs Get M&A Fever Again
- Quote of the Week: Betting on Justice
PAGE ONE Economics®An informative and accessible economic .docxbunyansaturnina
PAGE ONE Economics®
An informative and accessible economic essay with a classroom application.
Includes the full version of Page One Economics ®, plus questions for students
and an answer key for classroom use.
National Common Core State Standards (see page 8)
CLASSROOM EDITION
April 2016
Stock Market Strategies: Are You
an Active or Passive Investor?
Scott A. Wolla, Ph.D., Senior Economic Education Specialist
https://www.stlouisfed.org/education
https://www.stlouisfed.org
If you ever ask an economist which stocks to buy, chances are you won’t
get a specific answer. Instead, you might hear about the “efficiencies” of
markets.1 In fact, there’s an old economics joke about market efficiency:
Two economists walk down a sidewalk—one is older and wiser and the
other is younger and less experienced. The younger economist says, “Look
a $20 bill” and bends down to snatch it. The older economist says, “Don’t
bother! It can’t be real or someone would have already picked it up.”
The joke is meant to exaggerate the belief held by many economists that
markets quickly adjust to new information. Financial markets are said to be
“efficient” if they leave no “money on the table” for very long. If there’s an
opportunity to make a profit, buyers and sellers will swoop in and take it.
Hence the joke—a $20 bill left on the street for any length of time might
not be a real $20 bill at all.
Making Money in the Stock Market
Savers have many investment options to choose from. Investing in stocks
has risks, but over time, the stock market tends to have higher average
returns than other popular investment options (see the boxed insert “Stock
Market Returns Over Time”). Investors earn money on their stock purchases
through dividends and capital gains. Dividends are shares of a company’s
net profits paid to stockholders. Dividends are often paid quarterly and
are commonly associated with established, profitable companies. Capital
gains are the profit from the sale of a financial investment—for example,
when a stock is sold for more than the original purchase price.
Every investor hopes to earn high returns—dividends plus capital gains—
while minimizing risk. An effective way to minimize the risk of investing
in stocks (a relatively risky financial asset) is to diversify. Diversification
means to invest in various financial instruments—not just a specific one.
Stock Market Strategies: Are You
an Active or Passive Investor?
Scott A. Wolla, Ph.D., Senior Economic Education Specialist
GLOSSARY
Bonds: Certificates of indebtedness issued by
a government or a publicly held corpora-
tion, promising to repay borrowed money
to the lenders at a fixed rate of interest
and at a specified time.
Capital gains: A profit from the sale of finan-
cial investments.
Diversification: Investment in various finan-
cial instruments in order to reduce risk.
Dividend: A share of a company’s net profits
paid to stockholders.
Efficient market hypothesis (EMH): The
theory that the.
DealMarket Digest Issue143 - 30 May 2014Urs Haeusler
SEE WHATS NOTEWORTHY IN PRIVATE EQUITY THIS WEEK /// ISSUE 143 - May 30, 2014:
- Eye the Transaction Alpha for Team Selection
- PE-Backed IPOs Hit a High
- Family Offices Deepen Direct Investing Activity
- Accor Announces Billion Dollar Hotels Buyout
- The Show Me the Money Ratio
- Quote of the Week: Good Stewards
DealMarket Digest Issue116 - 8th November 2013Urs Haeusler
- PE Eyes Multi-billion Investment in German-owned Oil & Gas Unit
- New Study Reveals Emerging PE Trends and a Major Shift
- PE Outperformance: Insight into Returns at Top US Pension Funds
- Insurance Industry M&A Trends Downwards: A Global Multi Year View
- PE Industry Sees Recovery But Increasing Competition
- Quote of the Week: Seismic Strategy Shifts
VENTURE CAPITAL
Overview of the Venture-Capital Industry
Types of Venture capital firms
Venture-Capital Process
Stages In Venture Financing
Locating Venture Capitalists
Activities of Venture Capitalists
Approaching a Venture Capitalist
Similar to White Paper - Ashford Capital - Capturing the Small Cap Effect (20)
White Paper - Ashford Capital - Capturing the Small Cap Effect
1. WHITE PAPER
1
Small cap outperformance is not an illusion. Since the University of Chicago published Rolf W. Banz’s
seminal work, “The Relationship Between Return and Market Value of Common Stocks” in 1981, the
prevailing belief of the financial industry has been that investing in companies with small market
capitalizations – generally accepted as between $300 million and $3 billion – has the potential to return
greater performance to investors than investing in less nimble large cap stocks1
. This “Small Cap Effect” has
been analyzed, deliberated, and dissected for decades, and subsequent studies have proven that, with some
caveats, the outperformance of small capitalization stocks on both a risk-adjusted and absolute basis is real.
Capturing the Small Cap Effect
This phenomenon has been well-tested in the years since Banz’s work was published. Respected
scholars and analysts including Eugene Fama and Kenneth French, Tyler Shumway, Vincent Warther, and Cliff
Asness have all concluded that the Small Cap Effect is not an aberration. However, the stocks selected must
meet certain criteria in order to increase the likelihood of capturing outsized returns. These criteria include
strong balance sheets, good free cash flow and earnings, and fundamentally sound business models.
Traditional indexing doesn’t incorporate these parameters. In fact, historically, an index like the Russell 2000
Growth might hold up to 30% non-earnings companies. As of mid-2016, of the 1,165 companies included in
that index, only 64.4% were earnings-positive.2
These conditions are neither surprising nor new to active managers in the small cap universe.
Theodore H. Ashford, founder of Ashford Capital Management – an experienced and established registered
investment advisor founded in 1979 – recognized and implemented these investment parameters several
years before the Banz study was even published. Over the course of the last three decades, through the ups
and downs of many economic and market cycles, Ashford Capital Management has remained firm in its
conviction that following these criteria in our selection of small cap companies for our clients’ portfolios is the
key to capturing the “Small Cap Effect.”
Theodore H. Ashford’s investing career started while he still was a student at Harvard. He explained in
1987’s The Passionate Investors that one of his first clients was the investment club of the Harvard Business
School. Ted was attracted to smaller companies that had interesting business models, strong management
teams, and unique competitive advantages. He turned his focus to “small situations,” finding and purchasing
small companies that had not yet been discovered by institutional investors. These had to be companies that
the investor “was content to hold for long periods of time” so that management could implement its strategy
and grow the business.
Ashford Capital Management, Inc.:
Capturing the Small Cap Effect since 1979
1
Past performance is not indicative of future results.
2
Data source: Bloomberg as of July 5, 2016.
2. WHITE PAPER
2
Theodore Ashford is now the Chairman of the Board of Ashford Capital Management, having passed
the reins of CIO and CEO to his son, Ted Ashford III. Ted III, after years of experience as an analyst at Ashford,
promotes a firm-wide culture that prioritizes discipline and goal-setting. His personal approach helps to
“channel decision-making and analyze information, not data. It’s becoming more prevalent that data is the
only thing a large company will provide.”
Turning Challenges into Opportunities
Small cap investing (like all investing) has characteristics that can be classified as “double-edged.” Its
historical volatility creates return dispersions that are much greater than the large cap market. However, that
same increased volatility should be viewed as opportunity by the experienced and disciplined small cap
manager. Increased volatility is generally created by low trading volumes (illiquidity), which leads to hyper-
sensitivity to company news, economic forecasts, and general market sentiment. These low trading volumes
result from lack of Wall Street analyst coverage and lack of institutional ownership of these companies.
Additionally, by their very nature, small cap companies tend toward smaller floats compared to larger
companies, which compounds the illiquidity and volatility issues that a manager like Ashford Capital
Management faces.
That illiquidity challenge becomes an opportunity in the hands of an experienced small cap trader like
Daniel Dziados, a ten-year veteran of the firm. Daniel comments on the trading nuances of the small cap
universe: “today everything is much more ‘direct to market’ with algorithms, the influx of additional
exchanges, and dark pools. These are all different ways to minimize our ‘footprint’ in the market so we
operate with low exposure.”
Over the last decade, Dziados has seen significant changes as a trader in the small cap world. The
advent and subsequent growth of dark pools, lit pools, upstairs markets, and direct-to-market capabilities
have proven to be advantageous when dealing with less liquid securities. However, the main tools in
executing a successful trading strategy are discipline and patience. Dziados adds, “Building into a position can
take just a day, or it can take as long as a few weeks. Our price discipline is a battle with market prices. That’s
actually a positive. It really speaks to our price-versus-valuation discipline and process. The reality is that if
the price gets away from our intended entry point, we generally get two or three more chances to execute
due to the volatility of small caps. Having a deep understanding of the names in our portfolio is our
trademark.”
Discovering Attractive Small Companies Before Others
Ashford Capital’s focus is uncovering mispriced, misunderstood, and ignored companies with
significant growth potential. Those opportunities are rare in the large cap arena. A smaller company with
sound fundamentals and low market saturation has a better potential to grow earnings 20% or more than a
larger company whose most aggressive growth period is likely in the past. In general, many large companies
3. WHITE PAPER
3
experience single-digit earnings growth.3
The same qualities that we find attractive in a stock may draw the attention of larger companies. True
organic growth can be challenging for a large company to achieve, so it may instead look toward acquisitions
in order to grow. Since 2008, low interest rates and high corporate cash balances have fueled M&A activity.
Hoarding cash or using it for stock buy backs and for acquiring other companies has become the go-to growth
strategy for many large corporations.
It can seem like a bonus for a small cap investor if one of the companies he or she owns performs well
and is acquired by a larger company for a premium. However, solely looking for the ‘buyout bait’ as a small
cap strategy may be futile or even counterproductive. Analyst Joseph Petko, 16 year veteran of Ashford
Capital, comments, “M&A is not one of the inputs in our company analysis process. We don’t invest for M&A.
If it happens, it happens. There’s no doubt that we’ve seen it many times over the years we’ve been
managing capital, but if we own a company that is growing well enough that it is attractive for acquisition,
we’d rather it not be bought out. Those types of companies usually have better growth than the acquiring
firm.”
A Case Study of a Criteria Company 4
One of our analysts found a biopharmaceutical company with a market cap of $192 million that was
focused on acquiring, developing, and commercializing proprietary products that addressed the needs of
patients under the care of gastroenterologists, endocrinologists, and other physicians.
When we discovered the stock in 2010, several factors made this a ‘criteria company’ in our view. First,
it had a solid balance sheet, with $70 million in cash and just $10 million in debt. Second, it had strong
leadership. Founded and headed by an executive of a much larger pharmaceutical company, its management
team had a proven track record of vision and sound decision-making.
Third, the company had a strong business model. It was on the cusp of launching a new drug which we
believed would give it a unique competitive advantage as well as leverage in its business model stemming
from a strong pre-existing sales infrastructure.
We became interested in the stock after the company had experienced several setbacks during 2010,
first when a competitor released a generic version of one of its drugs, and then after a problem surfaced at
one of the company’s suppliers’ manufacturing facilities.
Those events caused the company’s price to plummet 44% from $5.62 to $3.17, a level at which our
work on the company told us was oversold. We started buying shares at $3.17 in October 2010. Our analyst
3
Per Bloomberg as of 7/11/16, the S&P 500 has an estimated long-term aggregated EPS growth of 8.43%. In general, these forecasts refer to
periods of between three to five years.
4
Not all small cap stocks selected by the firm have resulted in the type of gains discussed. It should not be assumed that investments in all
securities were or will be profitable. All investments in securities involve risk and the potential for loss of capital.
4. WHITE PAPER
4
Joseph Petko believed that, despite the negative earnings resulting from the two setbacks, the company was
well-placed to excel in the future due to its clean balance sheet and solid product lineup. This investment is a
great example of thorough research enabling an accurate long-term valuation based on facts.
Exhibit 1: Example of Ashford Criteria Company — Small Biopharmaceutical Company
Stock price from October 1, 2010 through January 2, 2014
Source: Barchart.com
Over the course of the next few months, the manufacturing facility came back online and the company
grew, aided in part by damages won via patent infringement litigation against the company that
manufactured the competing generic product. In January of 2014, a larger pharmaceutical firm acquired the
criteria company for $32 cash per share, an increase of over 900% on our original investment.
According to Joseph Petko, “We would almost have preferred the stock not be acquired as we believe
it would have continued to grow at a faster rate than its acquirer.”
Conclusion
Small cap outperformance requires investing in quality companies, what we refer to internally as
‘criteria companies.’ Joe Petko summarizes: “Our focus is to identify undiscovered growth opportunities –
good management team, solid balance sheet, financial discipline, proprietary products, and high barriers to
entry in their industry.” He adds, “The management has to have a clear growth strategy that can be easily
5. WHITE PAPER
5
explained. How do they plan on gaining market-share?”
Uncovering a unique new idea and recognizing value that others don’t yet see requires experience,
discipline, and patience. Assessing whether a small cap company is a quality ‘criteria company’ that can be
held for many years means putting substantial time and resources into intensive due diligence.
Ted Ashford III adds, “It’s harder to find good small companies top-down, but bottom-up, fundamental
investing allows us to tap our networks, industry relationships, and get to know the management and people
of the companies we are researching and potentially investing in. We not only work to get to know our
companies’ managements and personnel, we work just as hard getting to know their suppliers, buyers, and
competition to get the most detailed view of the company and its potential. We put in the work as if we’re
investing in a private company – many on-site visits before and after we invest, original research and
modeling in-house, and a team approach to analyzing all of the information.”
He continues, “Where we’re different than most small cap investors is that we are buying a business,
not a stock. We’re not stock pickers; we invest long-term in companies and their plans for growth. We need
to understand a management team’s plan to create long-term value, and whether they have the experience
to execute it. We need to dive into their balance sheet as well as understand their unique advantages and
disadvantages.”
Having a verifiable, repeatable investment process that has been empirically proven to include the
appropriate inputs to control selection for “quality” is Ashford’s competitive advantage.
Talley, Madelon Devoe. (1987). The Passionate Investors: Secrets of Winning on Wall Street from Bernard Baruch to John
Templeton. Crown Publishers Inc.
Asness,Cliff, & Frazzini, Andrea, & Pedersen, Lasse H. (2013). Quality Minus Junk. Retrieved from http://www.econ.yale.edu/
~shiller/behfin/2013_04-10/asness-frazzini-pedersen.pdf.
Banz, Rolf W. (1981). The Relationship Between Return and Market Value of Common Stocks. Journal of Financial Economics.
Shumway, Tyler, & Warther, Vincent A. (1999). The Delisting Bias in CRSP’s NASDAQ Data and Its Implications for the Size Effect.
Journal of Finance.
Ashford Capital Management, Inc. · 1 Walker’s Mill Road · Wilmington DE 19807
302.655.1750 info@ashfordcapital.com
The information provided in the case study above should not be considered a recommendation to purchase any particular
security. There is no assurance that any securities included in Ashford Capital Management Inc. investment products will remain
in the portfolios or that information provided herein will remain the same at the time you receive this material. Any securities
discussed do not represent all of the securities recommended for purchase by ACM.