Manager sees investment opportunity in America's passion for wellness.
Philip Tasho's eye for undervalued stocks devoted to dietary health has more to do with his stock-buying criteria than his passion for cooking and eating or a family with a strong culinary tradition. After graduating from Grinnell College with a degree in Russian, he took a year off to explore the possibility of joining his father in the restaurant business.
"I wasn't enamored with the restaurant industry," the 52-year-old Tasho recalls dryly. Instead, he gravitated toward the business end and attended graduate school at George Washington University to obtain an M.B.A. in finance and investments. As manager of the Aston/Tamro Small Cap fund, Tasho has nonetheless made his mark on the food business by capitalizing on the public's passion for bulking up on vitamins, organic foods and natural products. Several fund holdings are involved in dietary supplements or organic food, an area that Tasho sees as part of an industry that is both attractively valued and positioned for growth. "The organic food industry is expanding into grocery stores and even Wal-Mart," he says. "It's part of a wellness theme in the portfolio."
The fund has owned NBTY Inc. (formerly Nature's Bounty), a leading producer of nutritional supplements, over various periods in its seven-year history. During that time, the stock has traded as low as one-and-a-half times sales and as high as three times sales, depending on changes in investor sentiment. Often, those changes have been driven by developments in the nutritional supplement business, such as a government report about the effectiveness of a particular vitamin or supplement. If a negative report sends the stock down, Tasho sees an opportunity to buy a great company at a good price. "NBTY has a fortress balance sheet, superior operations, tremendous free cash flow and the ability to prey on the weakness of its competitors by acquiring them when they're depressed," he says.
Other health-conscious holdings include Hain Celestial, a leading organic and health food company that also has grown through acquisitions. It makes Celestial teas, as well as soy milk and personal care products such as lotions and soaps. While organic food and ingredient company Sunopta also has growth through acquisitions, integration costs have hit its bottom line. Despite that setback, top-line growth remains strong.
A Measure Of Sentiment
To find attractively priced securities, Tasho looks at how a stock's valuation has changed under various market conditions in the past to get a handle on how it may react under similar circumstances in the future. Using traditional measures such as forward price-to-earnings, price-to-book and price-to-sales ratios, he gauges whether investors are eyeing a company with rose-colored glasses or skepticism. Price-to-sales ratios are more insightful for cyclical companies, while price-to-earnings ratios reveal important clues about stable growers. "Value is really just a measure of sentiment, of how much people will pay up for a stock in the best of times or how much they don't want to own it in the worst," he says.
If a stock is trading at a low point of its valuation range and Tasho thinks there is a catalyst for change, he may step in. That catalyst can fall into one of three themes: consolidation, restructuring or innovation. Consolidation is dominant at 62% of assets, restructuring makes up 30% and innovation, which encompasses new products or services, accounts for 8%.
Consolidators must have several important characteristics, including a good core business with leading market share, stable management and a strong balance sheet with strong cash flow and below-average debt that will allow a company to execute an acquisition strategy effectively. NBTY, Sunopta and Hain Celestial all fall into this category.
Like consolidators, companies in the midst of restructuring must have a good core business and a leadership position. But Tasho also requires a catalyst for a turnaround, such as new management, and signs that companies are taking steps to pare down debt and improve cash flow. General Cable, a maker of wire and cable products, fell into this category a few years ago as it was attempting to climb out of debt through cost reduction and streamlining. It has since recovered and is using free cash flow to make acquisitions in Europe.
NetFlix, a holding in the innovation category, fell precipitously three years ago over concerns about competition from larger rivals such as Blockbuster and Wal-Mart. Good customer service, a broad choice of titles and competitive pricing helped the stock recover.
Technology stocks account for 21% of portfolio assets, the highest weighting in that sector that the fund has ever had. Tasho says valuations are part of the attraction. When he ran quantitative screens to winnow down the vast universe of small-company stocks early last year, he found that about 60% of the companies that popped up were involved in information technology.
He also knew that while company spending on technology infrastructure had almost ground to a halt a few years ago, things have been picking up in areas such broadband, Internet security, internal networking and mobile technology. Companies that stand to benefit from increased corporate spending include Packeteer, a leader in bandwidth optimization that allows companies to expand their network capacity efficiently, and Polycom, which has a leading market share in the expanding videoconferencing industry. The industry as a whole is going through restructuring and consolidation, which should help near-term returns.
Restructuring plans don't always come to fruition, a reality underscored by the fund's underperformance relative to its peers in 2004 and 2005. One of its investments at that time, supermarket chain Winn Dixie, eventually filed for Chapter 11 bankruptcy. "Some of our investments didn't work out and others took longer than we expected to execute their strategies," says Tasho, who notes that the fund rebounded sharply in 2006 when a number of recovery and consolidation scenarios eventually played out.
Recent portfolio laggards include some restructuring plays, including Sharper Image. Same-store sales continued to disappoint, and changes in senior management have led to increased uncertainty by investors. Tasho says the company represents an interesting restructuring opportunity and has a capable management team with a history of success. Another restructuring laggard, La-Z-Boy, is feeling the impact of the housing slump. Despite this, management has made a good start at reshaping operations, the stock is attractively valued and the company's balance sheet is in excellent shape.
A concentrated portfolio of 40 to 60 stocks is one reason the fund is more volatile than many of its small-cap blend peers, a characteristic that prompts Morningstar analyst David Kathman to observe, "Investors who can't handle big year-to-year performance swings may be happier with a tamer fund, but those who can tough out the occasional low points are likely to be satisfied in the long term."
The blended portfolio of growth and value stocks invests most of its money in companies with market capitalizations of under $2.25 billion at the time they are purchased, and holdings have a median market capitalization of $1.4 billion. In addition to paying attention to valuations to help control risk, Tasho notes that he gives roughly equal weighting to most names in the portfolio and never allows one stock position to build up to more than 5% of assets. The top ten holdings represent 26% of the portfolio's value.
Tasho learned risk management early in his career, as the only securities analyst in a bank trust department. When he started that job in 1980, the stock market had been in a trading range for almost ten years with no end in sight. "The main consideration at that time was not losing money," he recalls.
Working in a bank trust department added another layer of pragmatism to the investment process. "My mandate was to come up with one stock selection a month and then write an eight- to ten-page report on it for the investment committee," he says. "I had to wait a month before I could even discuss my recommendations, so I had to make sure they were going to work out." Often, that meant buying financially sound industry leaders at times when they were depressed, a strategy that he has followed for more than 20 years.
The safety-first mindset grew out of step in the late 1990s, when investors tossed caution to the wind and risk became the path to reward. Tasho says that 1999, when the Nasdaq soared 86%, was his toughest year as a money manager. That changed in 2000 when small stocks plunged and more value-conscious managers like Tasho began to shine again. The fund's first three years after its inception in late 2000 were strong ones.
Although it's more difficult to find reasonably priced small-company stocks than during the post-plunge dark days, Tasho believes that valuations for the group as a whole "aren't too extreme. There is no sign of an overly ebullient IPO market that has bloated prices for small-company stocks in the past. And improved regulatory oversight and alternative forms of financing that allow them to remain private as they build their businesses have made companies that do go public stronger."
