A bean counter can keep your books, but can the man behind the green eyeshade make your investments grow? CPA-trained Jim Tringas, co-lead manager of $1.9 billion Wells Fargo Special Small Cap Value Fund (ESPAX), sure can.
Of 1,104 U.S. diversified stock mutual funds in business for the entire decade ended Dec. 31, as tracked by Morningstar Inc., only 44 managed to beat the S&P 500 in the past one, three, five and 10 years. Those funds are IBD’s 2017 Best Mutual Funds Awards winners. And Special Small Cap Value is one of them. The fund was up just 0.4% year-to-date going into Thursday, but it was running ahead of its small-cap value peers in a stock market environment that’s now favoring large-cap growth stocks.
Tringas and his co-managers know they can count on such slack times and have a proven way for handling them. “The key to our success is in not trying to hit home runs,” Tringas said. “It’s in just trying to get on base. Maybe hit a single, maybe draw a walk. Then we just try to get to second base, then third, then home. And not giving up a lot of runs.”
Tringas says the fund’s focus on winning by doing a lot of little things right stems from the training that he and fellow co-lead manager Bryant VanCronkhite share. Both started out as certified public accountants. “With CPA backgrounds, we have a more conservative, cautious approach than most fund managers,” Tringas said. “So we don’t take a lot of risk. We don’t take shareholders on a harrowing ride. We aim for smooth performance over time. And we do it in a way that beats peers and benchmarks with less volatility than many other funds. We get to the end point with a nicer ride.”
Their co-manager, Robert Rifkin, shares their approach despite not having a CPA background.
Take a look at some of their top performers among their top-25 holdings. Novanta (NOVT), which makes photonics and motion-control systems, is up 35%. DST Systems (DST), which makes software for the financial services industry, is up 16%. Containers manufacturer Silgan Holdings (SLGN), is up 19%.
Tringas, who is about to turn 51 and who has managed Wells Fargo Special Small Cap Value since 2002, talked with IBD about his investment approach from his office in Boston.
IBD: What does the “special” in your fund’s name refer to?
Tringas: I get that question a lot. When the fund was set up in 1993, the word was used a lot. It was originally part of the Wachovia Evergreen fund family, which got acquired by First Union (in 2001). The acquiring company already had a fund named Small Cap Value, so they couldn’t drop the “Special.” (Wells Fargo then acquired Wachovia in 2008.)
Now, when we speak to one another, we ask what’s special about a stock we’re considering buying. That’s our code for: What’s its competitive advantage? That’s its special sauce, if you will.
The second thing we look for is recurring free cash flow. The third thing we look for is a flexible balance sheet. That means they’re underleveraged. We look for companies with low or no debt. They can use their financial flexibility to create value. They can create shareholder returns, they can invest organically in a new plant or a technology platform to enable them to improve working capital and increase margins over time.
IBD: What is the key to this fund’s consistent outperformance?
Tringas: It comes down to focusing on the things we’ve discussed: portfolio construction and paying attention to risk. It’s in risky environments where we distinguish ourselves. If we have a portfolio of companies that are high quality, generate a lot of free cash flow and (carry) little or no debt, those are the companies that investors want to buy when the market sells off.
Our companies hold up much better when the market sells off. They operate from a position of strength. We usually outperform in those markets.
IBD: Let’s talk about your theses for interesting holdings as of your latest disclosure. You’ve been building your share count in Central Garden & Pet (CENT) for several disclosures. What’s the attraction?
Tringas: It’s a turnaround. For about 10 years they went nowhere. Management teams came and went. But what had us excited is that they are not capital intensive. Their end markets have seasonality, but they are attractive. Management there today has improved distribution and rationalized the number of products, bringing out their potential.
They barely made money in 2012 through 2014. This year they should make $1.40 to $1.50 a share. As a company fixes its inefficiencies, it has more ability to create value. I’m not saying at the current price it’s awesome. But we have a lower cost basis.
IBD: You’ve also added to your stake in Novanta. Why is that?
Tringas: They make lasers or laser-based systems for machine-cutting tools or for high-precision surgical applications.
They work with customers to create a tool for that customer. So they are essentially a sole-source supplier. And as things wear out, they get follow-on orders. Also, (some top management) came from PerkinElmer (PKI), a medical research equipment company. So Novanta began to tilt toward medical-care markets, which is less cyclical than their (nonmedical-care markets). Now revenues are about fifty-fifty from medical end markets and other end markets. Our models show there are still substantial opportunities for them to continue this value-creating strategy.
IBD: Executive headhunter Korn Ferry (KFY) is yet another name you’ve added to. Why do you like it?
Tringas: They have great relationships with executives they’ve helped place at Fortune 500 companies, and it’s natural to serve them now. They’ve done a smart job of diversifying into a consulting-type businesses. That provides more recurring revenue than their core executive recruiting.
With more stable cash flow, they get more access to cheaper borrowing, so they have more opportunities to create value through a flexible balance sheet.
The risk is that if we get a recession, their executive recruiting business will be hard hit.
IBD’S TAKE: Korn Ferry ranks No. 2 in IBD’s Commercial Services-Staffing industry group. Its top-notch SMR Rating of A from IBD means it is in the top 20% of stocks in terms of sales growth, profit margins and return on equity ratios. See how its additional, easy-to-understand fundamental and technical data stack up against that of rivals at IBD’s Stock Checkup.
IBD: DSP Group (DSPG) is a small designer of wireless chipsets. Is this a play on an overlooked gem?
Tringas: They’re not on anyone’s radar screen. They’re run by an Israeli management team and have a phenomenal balance sheet. They have a lot of new products that we believe are targeted for mobile phones and wearable devices, including speech recognition and audio technology, that are unique and valuable.
They’re profitable now. And to the extent that they can monetize new markets, they could be even more interesting.
IBD: Mueller Industries (MLI) makes copper and brass tubes for the HVAC, refrigeration and plumbing markets. Where’s the sex appeal?
Tringas: They’re not sexy, they just make money. Their products go into residential and nonresidential end markets. If the economy grows 2%, give or take, that’s good enough to let them grow earnings. And they paid a special dividend of $8 per share (in March), so they’re good stewards of capital who rewarded long-term shareholders.
If there is an infrastructure buildout, it will create demand for the things they sell.
IBD: Earnings per share growth for Associated Banc (ASB) has accelerated for five quarters in a row. What else do you like about it?
Tringas: The CEO is Phil Flynn. He sold Union Bank in 2008 when we owned it. We believe he knows how to turn around a franchise. When he came in, this company was on the verge of failure. It’s doing better. We believe this company will be sold. We have no idea when. The likely buyers are Canadian banks because Associated is in the upper Midwest and would give them a foothold in the U.S.
IBD: Atkore International Group (ATKR), a construction products maker, is a newcomer to your portfolio. What’s your play?
Tringas: They have similar end markets to Mueller. They also have a mechanical products and services division.
They generate an enormous amount of cash flow. Companies that come out of private equity generally are well run. When they go public, they still have their discipline. Companies like this don’t have a flexible balance sheet, but this has enough free cash flow that it continues to deliver and can add value to shareholders over time, and it is reasonably priced.
IBD: Hancock Holding‘s (HBHC) EPS grew 13%, 237% and 633% the past three quarters. Is this a rebound story for a bank exposed to energy companies?
Tringas: This is a Southeastern bank with exposure to energy. When oil went to $26 a barrel from $80, they had issues with risky and nonperforming loans. But oil has come back. Nonperforming loans on their books are down a lot. A lot of those companies shored up their balance sheets through equity offerings.
IBD: Jim, how often do you talk buys and sells with your team?
Tringas: There are ad hoc conversations initiated by analysts coming to me, saying this or that stock is getting rich, the risk-reward ratio is telling me we need to cut the weight. Doesn’t mean we’ll do it, but we talk about it.
We have a regular weekly meeting every Thursday, where we discuss buys and sells. It’s amazing how much macro conversation happens for bottom-up guys like us.
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