On October 15, The Wall Street Transcript interviewed Richard J. Jandrain III, Vice President and Managing Director, Growth Equity at Fort Washington Investment Advisors, Inc. Key excerpts, including his small-cap growth picks, follow:
TWST: What are some of the companies in your portfolio that you feel are representative of your investment approach and the reasons why you were attracted to them?
Mr. Jandrain: I could talk to any of our various sectors, but I will focus on technology specifically since I follow the sector. One of the holdings that we have in the portfolio is Arris (NASDAQ:ARRS). The stock looks attractive in our quantitative process and the fundamental story is very strong. In terms of capitalization, the company is about $1.5 billion in market cap. Arris Group helps the cable industry deliver the triple play and other products. Their equipment basically allows the cable companies to deliver a menu of various products such as voice over Internet protocol. There is a lot of room for more customers to go to a VoIP-based system. Fundamentals look very attractive. We think that there are a number of new products that Arris will help cable companies to roll out. Once we get to the penetration levels that cable companies are striving for, the next thing that will drive Arris is a continual upgrade in terms of the overall bandwidth needs. We look for companies that have improving fundamentals, companies that have a good balance sheet, companies that have a proven management team, and companies that also have a reasonable valuation.
TWST: What other company would like to talk about?
Mr. Jandrain: Another company that we own in technology is Euronet Worldwide (NASDAQ:EEFT). Euronet provides a number of different services. They offer ATM services and money transfer services. They do this in a number of markets around the world. Global exposure is one of the reasons why we think this is a very exciting story. Euronet is in most emerging countries and in Europe. They have the infrastructure and the network developed to deliver ATM systems for many of the major foreign banks as well as a number of smaller independent banks in emerging markets. As you can imagine, there is a tremendous opportunity to deliver modern day financial services to emerging countries and their people. Whether it's money transfer or ATM services, Euronet can deliver. Another service that Euronet provides is prepaid cards. Prepaid services, especially for telephone, are very popular in Europe. Euronet has the expertise and the personnel on the ground and the ability to manage all the various services their clients want. Money transfer, ATMs or prepaid cards - Euronet is a leader in all three of these businesses. The company has focused on the markets where they think there is the highest potential growth. Euronet looks attractive in our work. It has the right profile with improving fundamentals.
TWST: Would you give us a third company?
Mr. Jandrain: Another company we like is Ultra Clean (NASDAQ:UCTT). It is in the semi cap equipment business. There are two different ways that Ultra Clean is going to continue to thrive. They make component pieces and modules for other semi equipment companies. They do business with, among others, Lam Research and Applied Materials. In the module market they are capturing market share. Ultra Clean has also located a significant piece of their manufacturing facilities in China. They are in China for a couple of good reasons. One is the lower cost for manufacturing. The second is, as you can well imagine, many of their customers are also locating and starting facilities up in China. We think that Ultra Clean has the ability to capture market share on a global basis. They also will transfer more and more of their manufacturing capabilities into China. This puts them into a low-cost structure and we think that is going to give them the opportunity to expand their margins. You have a company that a) is capturing market share, and b) is going to be able to expand its margins. This means that the earnings power of the company can increase dramatically. This is a story that is going to take a few years to evolve. We see the pieces slowly coming into place so that, as we go into 2008 and 2009, we think that we are going to have some very attractive leverage on the earnings side and a very compelling valuation for a company that right now is very small. It's only a little over $300 million in market cap, and we think that this is a company that over the years should be able to grow to almost $1 billion in market cap.