Finding Premier Growth Companies
Portfolio Managers Jamie Cuellar and Bob Male discuss how their approach to finding companies, that are rapidly growing and benefit from long term trends, is the foundation for the Buffalo Small Cap Fund investment strategy.
“Unlike many of our peers, we aren’t trying to pick stocks that are going to be the best performers in the next week or the next quarter, but trying to strive for the best long term performance on a risk adjusted basis over time.” ~ Bill Kornitzer, CFA
The Small Cap team is composed of 3 co-portfolio managers who also act as analysts, and we work very well together. We’re very comfortable challenging each other on our names.
We have a high degree of confidence in each other’s ability. There’s no egos here. So ultimately our goal is to get the best names in portfolio that are going to provide the best returns for our shareholders.
It all begins with our trend analysis. We have 26 trends which are long term in nature. Very predictable. They’re common sense. And these trends don’t change very often.
Then the next stage in the process is to identify companies that are beneficiaries of one or more of the trends.
We look to find what we call premier companies. Those are companies that we believe have proven management teams that understand the importance of under promising and over delivering to the Street and can fully articulate and execute upon their vision.
We talk to management teams. We’ll also talk to industry analysts. Talk to customers, competitors, and suppliers, making sure that we fully understand the investment merits of the company as well as understanding their economic model and really the risks that are going to be involved if we decide to invest in those companies.
We do have a good flow of companies that come through our offices, either through the IPO process, the initial public offering process, and those are companies that are just coming public.
Then we also have a proprietary scoring model where we’ll score 5 factors and the model will kick out what we believe is the upside in a particular security and the downside.
We like to find companies that have strong secular revenue growth, that have high margins that are hopefully expanding, and that have solid balance sheets that aren’t overly reliant on the capital markets to fund their growth.
We like to find scalable business models, and we want to find companies that we believe have sustainable competitive advantages against their peers.
The market cap ranges we generally look for the portfolio are 500 million at the low end and 4 and a half billion at the high end. And once they get to mid cap range, which we generally think is 10 to 12 billion, we’ll let them go and look for a smaller name to make sure that we keep it a small cap portfolio.
When we go in and take a position in a particular security, we’re looking at holding that name 3 to 5 years. So, the trend analysis I think is a differentiating factor. The fact that our holding period is typically longer than your average growth manager.
We’ll use valuation both to buy stocks and to sell stocks where we believe a lot of other growth small cap managers are more momentum based and don’t really use valuation as a guide to buy and sell names.
So I think what really differentiates us relative to our peers is our process where we combine the top down work of looking at trends provided with the bottoms up fundamental research we do on each individual company.
We believe that investing in a actively-managed, well-diversified portfolio of small cap companies that are rapidly growing and benefit from long term trends as well as trading at attractive valuations, are going to provide for superior growth of capital over time.
We get to know the companies we invest in and learn how they run their business.
Top-Down & Bottom-Up
We identify Top-Down broad, secular growth trends and search for companies from the Bottom-Up.
We construct our portfolios based on our own proprietary investment strategy.
Sticking to our disciplined investment strategy ensures we maintain a consistent, balanced approach.