A genius with small cap stocks tells his story
.Can you succeed with small cap stocks year after year? Yes, says a U.S. editor who talks to one investor who wins big with small stocks.
If you invest in small cap stocks, you don’t have to be a genius.
You do have to be alert and on the job. You can’t let a portfolio of small caps doze quietly as if it were full of dividend paying utilities.
Still, it wouldn’t hurt to be a genius. And one of America’s leading small cap editors knows one.
Mr. Max Bowser has been promoting the cause of small cap, or microcap stocks for years in the pages of The Bowser Report.
And he knows a fellow in Pasadena, California who, in his opinion, merits the “genius” label, at least when it comes to small caps.
He is Mr. Fred Astman, and he’s the head of First Wilshire Securities Management. Many people have sought out the views of Mr. Astman, but Mr. Bowser was one of the earliest, having first interviewed him in 1998.
Recently, he got on the line to Pasadena once again, to get this veteran investor’s views on the investment business, the ups and downs of the market, Chinese stocks, and of course, the virtues of small caps.
Stayed with small caps
Mr. Astman is a veteran in more than one sense. He was a navigator on B-24s and B-26s in World War II. He received a B.A. from the University of Connecticut and was an accountant before he got into the stock market business.
Twelve years ago, when these two seasoned investors first talked, Mr. Astman’s firm had $85 million under management. Today, that figure is $500 million.
Mr. Bowser’s first question is the question on many minds today. What’s up with the stock market?
He and his firm had an excellent run in 2009 like many others, says Mr. Astman. “Actually, we’ll have to give up some of those gains before it begins edging up again. By the end of this year, we’ll be on the positive side, modestly.”
Here’s where Mr. Astman differs from many investors. When the market levels out after a rally, many turn to large cap stocks. “But we’ve always stayed with small cap stocks,” he says. “We have consistently outperformed whether it was a big-cap or a small-cap year.”
Do so-called penny stocks appeal to your clients, Mr. Bowser asks? We must have at least 50 with a market cap of $100 million or less, replies Mr. Astman. There are about 30 in the $100-$500 million range.
Sophisticated investors
With 20 employees, including seven analysts and two portfolio managers, First Wilshire has $400 in managed funds and $100 million in a hedge fund that came into being seven years ago.
The figures are impressive, to say the least. The hedge fund has had an annual compound return of 30 per cent. The managed funds have returned 20 per cent annualized in the past decade.
But Mr. Astman underlines the difference in his funds. “If you have a real broad definition of small caps, that universe includes thousands of stocks that mutual funds and other hedge funds won’t touch.”
What’s more, he adds, his clientele is largely made up of doctors and other professionals, a number of them retired, investors “who are sophisticated enough to know they should be in small caps.”
In short, they know where the growth lies.
A volcano of potential
The bear market was just as bad for us as it was for everybody else, Mr. Astman says. But the recovery was that much better.
The hedge fund gained 71 per cent last year. Of course, it was down more than the other funds, since it was operating from a smaller base. Part of being a successful investor involves knowing how to take your lumps.
With his usual persistence, Mr. Bowser returns to microcaps. Is it difficult to take a large position, he asks?
Not really, is the answer. “There is more liquidity than there was 10 years ago.”
This veteran investor was also one of the first to take a big interest in Chinese stocks. One of his portfolio managers once ran Merrill Lynch’s operations in Hong Kong.
“Ten years ago, most of these companies didn’t exist,” says Mr., Astman. “Now they represent 25 per cent of our portfolio. Most of them have a PE [price-earnings ratio] under 10. Consequently they have higher growth rates.”
In fact, taken together, the stocks in his company’s portfolios have an average PE of 10, while the average for the S&P index is 17. Using the generally accepted level of 20 for a fully valued stock, it would appear that Mr. Astman’s firm is sitting on a volcano of growth potential.
His ability to pick ‘em has been recognized. Nelson Information, which ranks money managers (and is owned by Thomson-Reuters, by the way), puts Mr. Astman’s firm second among all managers over the past decade, and first in small caps.
“Aren’t you fortunate that you’re in this type of work since you enjoy it so much?” concludes Mr. Bowser. “That’s true,” says Mr. Astman simply.
But then, if you were sitting with a portfolio full of small caps that had gained double digits for the past 10 years and appeared to have more big gains ahead, you’d feel fortunate too.
In fact, you might feel like a genius.
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