Concentrated in Dominant Niche Players
Alger Small Cap Focus Fund
Amy Y. Zhang
Author: Ticker Magazine
Last Update: Apr 18, 8:39 AM ET
|Smaller companies with innovative profiles and leading positions in niche markets have the potential to maximize their profitable growth and eventually become successful large companies. Amy Zhang, portfolio manager of the Alger Small Cap Focus Fund, uses revenue as a threshold to identify companies displaying such promising characteristics early in their corporate lifecycle.
“We look for companies that are on the cutting edge of innovation, who can transform an industry. Maybe they have a disruptive technology, they can improve efficiency and productivity, or turn data into actionable information. We want to see leaders that really want to build an exceptional company over the long term.”
I absolutely care what we pay for our stock, which is why the bear price is so important. But we invest in growth companies. Price-to-earnings ratio, the popular measure of stock is not a good measure for most of our companies because a lot of companies are just getting to the inflection point for earnings. For small companies, we believe the most misused measure is PE, because earnings are not normalized yet.
Q: How do you manage portfolio risk?
We don’t invest in unicorns, hyper-growth companies. The most important factor for us is sustainable growth. We always use volatility to buy on weakness, especially when there is a big disconnect between fundamentals and stock prices.
I would say none of our top ten holdings are hyper-growth companies. It’s about high quality growth. We do invest in some emerging growth companies, but they tend to be smaller positions. They’re growing a lot, but they’re not that profitable yet. This is why the buy point is very important for our risk control. If you understand the solid bear case, that can serve us very well.
For example, Cvent Inc. (CVT), a leading cloud-based enterprise event management platform that seeks to simplify the management of event functions such as registration, e-mail marketing, and web surveys. You could have called it an emerging growth company when we initially bought it in 2015. It became one of our top contributors that year. They were clearly a dominant player, as the crux of its competitive advantage is the proprietary Cvent Supplier database built over the years to provide detailed, up-to-date accurate information of all hotels in a given vicinity; and we believed the network effects associated with the proprietary database would continue to result in accelerating revenue and profitability as the company continues to gain scale, and customers continue to sign up for additional functionality on both the event and hospitality side. The company had no debt and strong cash flow generating capability.
The stock declined significantly in February 2016, due to broad multiple compression across the SaaS software space and the company’s decision to make 2016 a year of increasing investment spend, pressuring earnings in the near term. However, given the improvement across business fundamentals, we viewed this as a transient headwind and believe the company will continue to improve its competitive position over the long-term. We view the event planning space as a fairly underpenetrated opportunity; with an estimated addressable market opportunity of $5 billion, Cvent only has 4% market share with revenue of just under $200mm, despite being the market leader in the space. We added on weakness during that period.
In April 2017, the company was acquired at 69% premium at $36 by Vista Equity Partners.
Was Cvent an emerging growth company? It was. Therefore, understanding the intrinsic value of the business was extremely important. Because we had a solid bear case, at the end, it delivered attractive results.
1 2 More: Mutual Funds Archive