The heart of the international fund’s strategy is finding companies with earnings surprise stories and separating them from those that are likely to be a flash in the pan. A onetime boost to earnings is of no interest to Scherschmidt—an earnings surprise that comes from one large order not likely to be repeated or the surprise from a big tax break the company gets after making a change in business location. On the other hand, when a company sees a sustainable earnings jump with legs, perhaps after it launches a new product with a competitive advantage or enters a geographic location with less competition or undergoes a big internal restructuring, these things grab his attention.


Once a company’s market earnings estimates come up to the firm’s, the fund will likely sell the stock because it is no longer misunderstood. Scherschmidt may also pull the trigger if the initial premise for buying a company deteriorates and earnings go down, perhaps because the company has a new competitor or there is some other unexpected development. If it’s a setback he considers temporary, such as a delayed order, he may decide to hold on to the position or even add to it if other investors get discouraged and the price goes down.

While the consistent sell discipline forces the fund to lock in gains, it also pushes up turnover and, in taxable accounts, adds to the capital gains tax bill. On average, stocks stay in the portfolio for nine to 12 months, which is “about the amount of time it takes investors to catch up with our expectations.”

Scherschmidt thinks investors are still behind on recognizing the potential of portfolio holding Pandora, a Danish midmarket jewelry company that sells its products in Europe, Asia and the U.S. One of the fund’s longer-term holdings, Pandora launched its IPO in 2010 after several years of rapid growth. It became part of the fund’s portfolio in 2012 after Pandora’s program to replace old inventory ate away at profits and the stock sold off.

The lightening rod for change is new management. “They’ve introduced new products, focused more on the fashion retailing business and made other changes that should accelerate topline growth and improve margins,” Scherschmidt says. “But investors are still wary because of what happened in the past.”

Australia’s Seek, the nation’s largest online employment ad company, is another holding that investors don’t fully appreciate yet. Scherschmidt added the stock to the fund earlier this year after Seek acquired the largest online job advertising site in Southeast Asia, a move he believes will give it a big competitive advantage and help it achieve economies of scale. The company is already improving revenue growth through quantity discounts and a matching service for job seekers and employers.

Linamar, a Canadian auto parts supplier that specializes in power trains, suffered severe losses when auto sales plummeted following the 2008 financial crisis. Even though sales  have picked up over the last few years, investors remain wary of the stock. “Most investors are negative on the economy, so they’re underestimating car sales and the demand for car components,” Scherschmidt says. “Companies like Linamar are cutting costs through robotics and moving into countries with lower labor costs. So even though profit margins are at or above prior peak levels, I believe there is still room for expansion.”
 

First « 1 2 » Next