If Loomis Sayles Small Cap Growth Fund were a baseball team,
it would be cruising into the playoffs near the top of its
And it would be doing so with a lineup that wins with singles
and doubles rather than home runs.
The fund is up 39.71% this year through Sept. 30. That tops
92% of its small-cap growth peers, which averaged 30.35%. It also
beat the S&P 500's 19.79%.
The $1.1 billion fund is closed to new investors. Co-managers
John Slavik and Mark Burns, on board since 2005, talked with IBD
about their approach from their offices in Boston.
Tell me about your strategy of relying on scoring runs with a
steady string of hits rather than just a few four-baggers.
You're right in the sense that we are not making big bets. But I
would say that we look for very dynamic growth companies that can
be very strong stocks over time. They can be home runs.
We also understand that because they grow aggressively, if
they take a misstep they can be hurt. So we control the
volatility of individual names by controlling position sizes and
with other tools. If one of our names goes off track, it does not
torpedo the entire portfolio.
Is your approach because investors were burned within the past 15
We've seen two bear markets in a decade, when many clients and
prospective clients had extremely bad experiences. So we're
trying to mitigate volatility and risk with higher-quality
stocks. Risk management is done at the stock level with position
sizes and at the portfolio level with large guardrails around the
What are some of those controls?
We have stocks whose balance sheets have less leverage than their
benchmarks. These companies are protected by barriers to entry by
competitors. They generate cash. And they have visibility into
their revenue streams, which makes them less volatile.
The holy grail is for a company to go from small cap to midcap
to large cap. Most won't achieve that. But we want companies with
a legitimate shot at that.
Give me an example, please.
Lumber Liquidators (
) has been a five-bagger for us.
We first bought it (in September 2011), early after they
changed management. We liked their business model, returns on
capital, margins of their stores. It became a bit of a housing
play as well. But we didn't buy it for that. We bought it because
it could take share within its category.
You got in early, when you saw a secular growth story. You've
been trimming since it became a cyclical story, right?
Why do you likeCommVault Systems (
) in comparison to other database managers?
We found that they had a data management solution that works in
any storage environment. And compared to others, CommVault gives
you a more granular view of data -- their software can process
data in small chunks and allocate it more efficiently in the
They give you an ability to move it, index it, protect it at a
more granular level than some imbedded solutions in the
Customers get a good return on investment, sometimes to the
tune of a 40% hard dollars savings vs. existing peers in the
And they're at the beginning of another major product cycle
(for Simpana 10), which has the potential to expand the
addressable market for them by almost 50%. And this is going to
reach areas like mobile, machine-log data (a log of every action
by every machine on a network) and analytics.
What do you mean by embedded solutions ?
Embedded refers to large storage players,EMC (
) andNetApp (
), that offer both the hardware and software component and tend
to have less robust software offerings, which can't process data
at the level of sophistication that CVLT can.
What distinguishesEpam (
) from other software product development firms?
We bought it in June. Many of their rivals are big-body shops --
they're labor intensive. Their services and therefore revenue
scale with their head counts. Those are not overly exciting to
But Epam is growing its customer base rapidly, driving their
top line. We think this is a 20% or so organic grower from a
Also, they're in Eastern Europe and the CIS region (many
states of the former Soviet Union), which has been
underpenetrated in this space.
And it's reasonably valued.
What distinguishesGrand Canyon (LOPE) from other for-profit
This is the only for-profit education name we own. It's a
This is differentiated. They have a traditional campus in
Phoenix, so students can have a regular college experience, live
in a dormitory. They have a Division I basketball team. Those
things have helped fuel the brand, which has enabled them to
leverage their online brand.
They offer a high-quality education for a reasonable price.
Those give visibility to differentiating their strategy.
You like names that stand out. Are low costs what
differentiateSpirit Airlines (SAVE)?
Clearly they are an ultra-low-cost carrier. They have
meaningfully lower airfares. They've opened geographies that are
not well served by traditional carriers, which has enabled them
to grow flights. And they have a clean balance sheet.
Noodles & Co. (NDLS) is new to the portfolio. Can their mix
of Asian, American and Mediterranean cuisines work?
We bought this at the IPO (in June). We didn't get a meaningful
allocation. The deal doubled on the first day to 36 from 18. We
had a 36 price target, so we did not buy more. When it became
clear in July it would not come back into our price range, we
eliminated it. We did think the concept is scalable. We hope
there will come a day when we can initiate a position again.
What distinguishesOasis Petroleum (OAS) from other small-cap
exploration and production firms?
They're very focused on the Williston Basin in North Dakota and
parts of Montana. And they're exploiting the Bakken shale play
(in the Dakotas and Canada). They were relatively early to the
play. They're operating more rigs in the play. They are in the
sweet spot of the play.
In addition to showing production growth of 50% this year,
their well costs are coming down.
And they're getting more involved in pad drilling, where they
drill more wells from the same acreage with horizontal wells.
It's a more efficient way to get the resource above ground
Prototyping does not sound sexy. ButProto Labs' (PRLB) share
price nearly doubling this year does.
They do CNC machining, which stands for computer numerical
control. It involves milling machines controlled by computers,
which are programmable, so you don't need a technician to control
the mill that's cutting a block of aluminum and to protect the
This company is disruptive. Their competitive advantage
resides in their software. If you are an engineer for a large
manufacturer, you can submit a CAD design for a part you need.
This system will tell you whether your CAD design is sound, give
you a quote based on the number of parts you need and a delivery
date, which is measured in days instead of the weeks or months
that you'd get from some mom-and-pop shops that they compete
They take share from legacy players. They're growing their top
line north of 25%. And there continues to be a lot of runway for
continuing their growth.
What enablesUltimate Software (ULTI) to compete with the much
We bought this in January 2009, in the bear market, when the
stock was in the midteens. It's up 10-fold since then.
They provide a payroll solution. They were a pioneer in the
Their solution is more elegant and lower cost than perpetual
licenses and installations on premises.
Their CEO has a sales background and built an aggressive sales
culture around taking share from the 800-pound gorilla, ADP.
In addition to payroll, they have modules in recruiting, time
management and other human capital areas, which increase the
average dollar per employee that Ultimate can obtain from its
Their penetration at existing customers and their revenue per
employee could more than double. In their smaller midmarket
customers, in theory revenue could go up by 50%.
What revs you up about new- and used-car dealerAsbury Automotive
When we bought the stock in 2010, U.S. car sales had bottomed and
edged up to 10 million units. They've rebounded to 16 million as
And it's almost become a razor-razor blades business. Almost
half of the revenue growth is from service, not sales.
And as sales rebound, there are more cars in the 2- to
5-year-old range (when owners focus on maintenance). That allows
service to be a tailwind for earnings.
Dorman Products (DORM) is a newcomer to the portfolio. Is it a
play on economic recovery?
We bought it in February. They make aftermarket auto parts used
by do-it-yourselfers and small mechanics. They're working on
vehicles more than five years old. It's a very steady business.
It grows in the low double digits. It's all about exclusive new
parts. If you're first to market with, say, the latest catalytic
converter, you garner the most news sales.
IsCoStar Group (CSGP) a play on a rally in commercial real
You're right. They want to be the Bloomberg of commercial real
estate data. Their data describes everything: number of square
feet on each floor of a building, lease rates, rental rates and
so on. It's sold to brokers and others.
They acquired LoopNet, the online commercial real estate
marketplace and a smaller competitor, which provided them with a
large customer base to cross-sell into.
You own about 100 names. Is that for risk
This is a diversified growth product that relies on stock
selection to drive excess returns. This is not a concentrated
product that relies on a small number of bets. And we don't make
bets based on the macro environment or the market. Those are too
difficult to replicate repeatedly.
And, yes, this product focuses on risk management. When people
hear that, they wonder if we are GARP (growth at a reasonable
price) or core investors. No, we are growth managers.