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WALL STREET, CALIFORNIA | MANAGER'S FORUM

A Small Ambition

Strong's Lisanti thinks big picture, broad trends as she considers small- and medium-cap companies' stocks.

March 04, 1997

Mary Lisanti hasn't been at the Strong Funds long enough to show her Midas touch for picking small stocks, but she certainly has had one.

Before joining Strong in October 1996, she guided Bankers Trust Small Cap Fund to returns of 19.3% in 1994, 58.6% in 1995 and 18.2% through September 1996.

By the time she left for Milwaukee-based Strong to manage its Small Cap Fund, she led an investment team that managed $2 billion for Bankers Trust. She has since reassembled that team at Strong. In January, Lisanti took over stewardship of the Strong Mid Cap Stock Fund as well.

Lisanti invests in small and medium-sized companies whose sales and earnings growth rates exceed their stock price-to-earnings multiples. She combines scrutiny of individual companies with a belief that broad societal and economic trends will provide a tail wind for certain industries.

Lisanti, 40, got her first taste of the stock market growing up in New York, where as a preteen she earned pocket money typing up her father's personal investment holdings on index cards. Her serious education began at E.F. Hutton, then continued at the Evergreen Funds and at Bankers Trust.

Lisanti was interviewed by Russ Wiles, a mutual funds columnist for The Times.

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Times: You have been on the job at Strong for only a few months, yet your performance over this short span seems to be suffering. What's happening?

Lisanti: Basically, it's just a style thing. If you compare us to other [small-stock] growth funds, we don't look that bad. The underperformance came mostly from our technology holdings, many of which fell late last year over general uncertainty about the economic climate. Our style has been a bit out of favor because we own the higher-growth stocks. But we haven't changed our strategy.

Times: Your approach mixes top-down with bottom-up investing--that is, you look at broad investment themes and combine that with careful analysis of individual companies. Can you elaborate?

Lisanti: From a bottom-up point of view, we screen companies to catch stocks that are inefficiently priced. We try to identify two types of firms: The first are good companies growing at least 15% a year in terms of profits and revenue, yet selling at a discount to their growth rate. By this I mean situations where the price-earnings ratio of the stock is below the company's projected growth rate over the next 12 months.

The second situation involves great companies that for some reason are not great stocks. When a company has a good track record yet there's a disconnect, usually it's because investors are worried that the firm's future won't be as good as the past. Sometimes those fears are justified. Sometimes they're not.

Times: Can you give an example of the latter type of company [in which the fears aren't justified] that you own in the fund?

Lisanti: Certain companies that provide information systems have reported disappointing earnings, which has prompted investors to sell. An example is HCIA, which has been growing around 35% a year. It trades at a P/E of 33 based on [estimated] 1997 earnings of around $1.30 a share, and 24 based on next year's projected earnings of $1.70 a share. So you get a little discount on its 1997 growth rate and a huge discount on its projected 1998 earnings.

HCIA provides integrated clinical and financial information systems for the health-care industry. By combining clinical and financial, medical providers can examine both the quality of care and its cost. Automation in the medical area will continue, because all parties want more value for their dollar. You need better information systems to deliver it.

Times: Are all of your favorite holdings in the tech area?

Lisanti: No. Another company, Blyth Industries, is the dominant maker of candles. This company has grown by better than 50% annually over the past five years. There are big short-sale positions [bets that the price will decline] in the stock. Investors are worried about new competitors entering the business.

But the candle business is huge. Even if you get a little more competition, it won't bother Blyth. For the fiscal year that just ended in January, I estimate the company earned about $1.25 a share. The stock trades at 27 times earnings. For the current year, estimates suggest the company will make $1.60 a share. Blyth is managed by an exceptionally strong group of people. The guy who heads the firm was a venture capitalist who helped to finance the company, then joined it.

Investors now are paying about 20 times next year's earnings for a company that probably can continue to grow 30% or more for many years. The candle industry is not expanding much, but the market is vast and Blyth is winning market share. The short sellers are betting that the company won't meet its profit targets and that competition will intensify. But the stock, which traded at $46 in December, now sells at $32. So you've had a huge price decline that I think was unwarranted.

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