Click on the company name to jump to Wanger's comments on the stock.
Christopher & Banks
Expeditors International of Washington
International Game Technology
Ralph Wanger says he won't be giving us "hot stock picks for the next hour."
Wanger would likely disapprove of awkwardly trudging out the cliche about the acorn becoming the mighty oak, but it's useful to enlighten our readers for a key point: Real growth takes time.
Wanger knows that better than just about anyone managing money. He has been the skipper of the (ACRNX) - Get Report Liberty Acorn fund since 1970, and he has amassed a phenomenal record by spotting small-cap companies poised for growth, scooping them up early and letting them ride. A list of his top-25 holdings reads like a Who's Who of ten-baggers (a ten-bagger, for the hour-to-hour crowd, is a stock you hold until the stock appreciates tenfold -- what a concept!).
Wanger jokes that he takes the slow and steady approach because he doesn't like to work that hard. But don't be fooled by the self-deprecating humor, which is also on display in his
"Squirrel Chatter" commentary on the Wanger Web site and in his 1997 book,
A Zebra in Lion Country
. Wanger and his team, which includes Charles McQuaid as co-manager since 1995, must be doing some hard work: The fund ranks in the top 10% of its small-cap growth peers for one, three, five and 10-year periods.
In this week's
, Wanger discusses his big winners (
International Game Technology, Harley-Davidson
), one big loser (
) and a few stocks that he thinks will be the next generation of ten-baggers.
1. Where do you see this market and this economy heading?
I believe we are in one giant trading range. The
can trade as low as 600 on the downside and as high as 1500 on the upside. I think we will be in this trading range for a minimum of another five years. Along those five years, we will experience lots of vigorous swings, but no particular overall trends.
Tenure: Managed fund since June 10, 1970
Assets: $5.37 billion
10-Year Average Annual Return: 13.25% (top 6% of category)
Top Three Holdings: International Game Technology, XTO Energy, First Health Group
Expense Ratio: 0.82% (category average 1.66%)
Liberty Acorn Information: 800-922-6769 or http://liberty.acornfunds.com/
Sources: Liberty Wanger Asset Management, Morningstar
This market reminds me of two other periods. One was 1969 to 1981, in which the market made a lot of moves, but ended up pretty much where it started. The other was 1930 to 1954, which was marked by similar swings.
In this market, it will be a little more difficult for amateurs to make money, but good companies will continue to perform well.
What about the economy? What do you envision -- double-dip recession, deflation?
I think we're already in deflation in many ways. The price of most manufactured goods continues to drop. I also expect continued sluggish capital expenditure spending until some of the capacity unwinds.
Do you expect this to remain particularly acute for the technology sector? Your fund has a relatively light tech weighting.
It's tough for technology because it was the favorite sector during the bubble. I don't know of any exception to the rule that says the subject of the bubble lags behind the market for years after it gets burst.
had a big run-up in the past month or so. But it has had five moves of more than 20% to the upside over the past three years. There's nothing sharper than a bear-market rally. That's what I believe we're seeing.
Despite these 20% gains, the broader trend for the Nasdaq has been a downward slide for nearly three years.
2. How is the small-cap arena poised compared with the broader market?
Small-cap can do very well. I expect it will outperform.
It's interesting. What we've been seeing in the market is a period of dramatic change. It has shifted in very important ways and investors need to realize that the previous way of thinking -- a 1999 attitude -- is not going to work.
Also, you can take a geological look at the markets. Big dinosaurs have died off; now, smaller mammals and birds survive and come to dominate. We have seen a lot of big dinosaurs fall the past few years; in fact, we have seen some big ones get down closer to our capitalization levels.
Take companies like
. These battered companies used to be the pillars of our economy. Sears used to be the biggest retailer in the U.S. It now has a market capitalization of about $8 billion, which makes it smaller than
Any falling dinosaurs piquing your curiosity?
These companies don't particularly interest me on the downside. I'd rather put my money behind a few smaller, high-growth companies that look to replace some of the old dinosaurs as they continue to grow.
Trying to figure out which ships start rising again is too difficult -- I don't want to work that hard. I'd rather find little companies that are poised to keep growing.
3. Let's talk about some of those little companies. According to Morningstar, your largest stake is in financial-services firms 23.1%, a little above the small-cap category average. Do you make broad plays based on sectors, or are you more of a bottom-up investor? Also, which financial-services stocks do you like?
Well, I do a little of both. My financial-services stake is similar to what you will find in many small-cap funds. It happens to be where a lot of the small companies with good growth prospects are. And it's a good business in general, a good place to be.
We find a lot of small banks that are good businesses, some look like possible acquisition targets.
We have decent positions in asset-management companies --
. We think these companies will continue to grow, and that the asset-management business still has upside.
Eaton Vance's average annual return for the past five years is 30.4%; SEI is 34.9%; Neuberger, which went public in 1999, has an average annual return of 24% during the past three years. Eaton Vance CEO Jim Hawkes was
profiled as one of seven executives for
Good CEO Portfolio.
4. You have held a few of those companies for a while. Do you have any specific time frame to hold on to a stock?
Well, let's see. I haven't held any stock for longer than 30 years. But I wasn't investing before then, so I suppose 30 years is a good time frame (laughs).
I prefer to hold stocks for as long as they continue to grow. We've held stocks for decades in the fund, as long as the company continues to deliver. That kind of long-term approach to investing doesn't make our brokers much money, but it has kept turnover down, which means expenses -- which run high in the small-cap world -- have been a bit lower than our peers. Our turnover has been running at about 20% a year, and it may be a little lower this year.
Liberty Acorn's expense ratio is a mere 0.82%, less than half the category average of 1.66%.
When we examine companies, we try to project what their growth prospects are for two years out. That's the short-term time frame. As long as the company continues to grow faster than the broader market, we'll hold them.
Of course, we do have a sell discipline. Every time we invest, we make a list of the reasons why we own it.
Sometimes we sell a company because it's grown into our expectations; that's always nice. Other times, the reason behind our decision to buy the stock doesn't pan out. Unfortunately, that's often the case. If we buy a stock based on the anticipation that it's going to roll out a new product that's going to have a big impact and it doesn't meet our expectations, we sell it.
5. Let's talk about stocks you are holding. Expeditors International is your fifth-largest holding. Can you tell me how long you've held the stock and what you like about the company?
Expeditors International of Washington
is a well-run company. We've held that stock, boy, for more than 10 years and just watched it grow.
Expeditors, whose stock has risen more than tenfold in the past decade, is run by longtime chief Peter Rose, who was also named to
Good CEO Portfolio.
There are several reasons why we like this company, thematically. It's in the export-import business, it's a freight and shipping company. Importing from Asia by air increases every year. If you look around your house at the things you own, you'll notice that, except for the food, pretty much everything comes from overseas, a lot of it from Asia. Somebody has to ship all this stuff, process the orders. This is a trend that will continue.
Expeditors has executed exceptionally well within this area; it's growing steadily. Now it's at the point where it's gotten big enough, they have enough scale to be fairly dominant and highly profitable. Other companies will have a tough time competing with it.
6. International Game Technology is your largest holding. It's been a very strong performer; do you see it having a lot of continued upside?
International Game Technology
is a classic downstream technology-trend play that we like.
The company has a near-monopoly position in selling a product that is valuable to customers, which are the casinos. The gambling business is a growing business, and the business is shifting more and more toward slot machines from table games.
The way to differentiate is by having the newest and fanciest slots, and International Game Technologies has them. The company isn't going to get a lot of new competition, either -- it's very hard to get a license for a new line of slot machines. IGT is in a very privileged position; the company gets 60% to 80% of the orders of a cool business.
Of course, this is a nice sin stock. Gambling is one of the few vices that is highly profitable in a legal and investible way. Cigarettes has gotten difficult, the whisky business isn't that good. Most of the other not legal. Well, gluttony is still available (laughs).
Do you have any gluttony plays? I didn't see any among your top-25 holdings.
Well, we own
-- so we're playing both sides. Both companies are solid and growing.
We were trying to decide how to name this theme in a way. I call it the Seat-Belt Extender theme -- they have those on airplanes now, for heavier people. I always seem to get seated in between two people who need them.
7. Subprime auto lender Americredit has been a big holding in the Acorn fund, and it's been the fund's worst performer this past year. Do you feel comfortable holding the stock?
Well, I wouldn't use the word comfortable.
is down 74% this year. We've traded this stock up and down a bit during the past year.
First of all, we think that it's going to survive. There are some parties who suggest people should be worrying about that. We think they will show a lower growth rate from what they have done in the past, but it will still be a good stock over the long haul.
They have had to adjust their balance sheet recently, which happens. Financial-services firms tend to run out of balance sheet.
It would've been nice if we'd sold more a year ago. But it's only 2% of the portfolio at the most. We're not betting the farm on it, but it's an important position and we're following it closely.
Liberty Acorn has 335 stocks in the fund, at last count, according to Lionshares.com.
In our opinion, the weak market has taken Americredit's stock below where it ought to be.
8. Harley-Davidson is another big holding; the stock has had a tremendous ride the past decade or so. Some people are concerned about its ability to grow. Where do you think the stock is headed?
has posted 10% to 12% growth in units -- the number of bikes each year. They've enjoyed rising profit margins over the course of the past decade.
The amazing thing about this company is they have showed no signs of noticing a recession. It's hard to find any company in America that sells to consumer market that has done this.
In my opinion, they still have more growth to do. You can't keep increasing profit margins. They're high now and that has to level out. Overall growth will trend down toward their growth in units. But this is a great company, and a very well-run one.
9. A lot of the stocks we've discussed have been ten-baggers for you. Can you name a few that you think will be ten-baggers over the next decade, but are at the earlier part of their trajectory?
One technology company we like is
. It's an impressive company that is growing steadily.
Three retailers we really like are two women's clothing retailers,
Christopher & Banks
These are all good companies -- small, growing quickly. It's fairly simple: You have good retail concepts. Start with one store, do it right, execute. Ten years later, you have 500 stores.
With Michaels, are you worried about Home Depot and Lowe's trying to get into their business? Lowe's has fashioned itself as being more women-friendly.
I don't think the average young lady is going to go to Home Depot to buy beads to make a necklace. And I've asked Michaels not to sell wallboard, so I think we can keep them separate.
10. The key to the success of most small companies is a strong management team. The past year has taught us how important it is to have trustworthy executives. How do you assess leadership at the small companies you buy?
Well, it's a little different in the small-cap arena. Most of the companies we invest in don't have executives careening around in jet planes because they can't afford them yet.
We keep an eye on a few things, such as excessive stock options. That's a problem across the board, but it's been reduced somewhat since stocks don't go up like they used to. Also, these little companies generally don't have pension-plan issues like bigger companies, so we don't need to worry about that too much.
The kind of management we look for are hard-working people who are interesting in growing their business and looking out for shareholders.
There are two big challenges with small-cap companies and leadership: First, most of these businesses are started out by an entrepreneur who has a great idea but has absolutely no idea how to run a company. Going from the great computer programmer to a guy who runs a business is always a challenge. That's one of the major places where small companies screw up.
The second challenge: I have seen small companies where they all want to be Jack Welch too soon. They worry about their perks and mistresses, and not the company. Usually has dire consequences; we stay away from those folks as well.