We place each of the Small Cap Value Fund’s holdings in one of three categories: Fallen Angels, Undiscovered Gems and Quality Value Companies.
FALLEN ANGELS
Usually making up the largest category for new investments, Fallen Angels consist of companies that are generally purchased below intrinsic value. Typically these are former growth companies that have stumbled — companies that have hit a bump in the road, but are not at the end of the road. These companies have often suffered a sharp price decline that we believe to be an overreaction by the market to a negative company event.
UNDISCOVERED GEMS
Undiscovered Gems include companies with low valuations due to lack of coverage and interest by analysts and investors. These companies are typically good growth companies that have been ignored by the market for any number of reasons. Perhaps the companies are too small for analysts and investors to take note. Or the companies may have come through long recoveries during which the earnings have improved, but not the stock prices.
QUALITY VALUE COMPANIES
Quality Value Companies generally have been through a sustained turnaround, are experiencing modest growth, or have exposure to deep cyclical or commodity swings. As with Fallen Angels and Undiscovered Gems, Quality Value Companies must have (1) a strong balance sheet or (2) a robust business model. We’re adamant that companies must possess at least one of these two characteristics, and we try to avoid companies that have both balance-sheet and business-model problems.
Of the three categories, Undiscovered Gems typically generate the best performance. In many cases, Fallen Angels “graduate” to the Undiscovered Gems category if they’ve been held in the Fund for a year or two and have recovered. Regardless of where they start, Undiscovered Gems usually experience the most improvement in fundamentals, earnings growth and, eventually, P/E multiple expansion.
Jim Larkins has been the Lead Portfolio Manager for the Wasatch Small Cap Value Fund since 1999. He joined Wasatch Advisors as a Research Analyst in 1995, working on the Micro Cap and Small Cap Growth Funds. He became a Research Analyst on the Small Cap Value Fund at its inception in 1997, and was named as a Portfolio Manager in 1999. Mr. Larkins graduated cum laude with a Bachelor of Arts in Economics from Brigham Young University. He later earned a Master of Business Administration from the Marriott School of Management at BYU.