Fund manager Brian Culpepper scouts for stocks that are either ignored by institutions or have been beaten up. He talks about two of his small-cap picks, and explains some of the fundamental metrics driving these choices.
Brian, you've had a track record of outperforming the benchmark index with this fund. Tell us how you're doing that. What's the strategy behind this fund?
Brian Culpepper: Our overall strategy is to aim for the best in small, bargain stocks. Over the past year, our stock picks have done just incredibly well overall.
Kate Stalter: What kind of small caps do you zero in on? Are you looking for growth names, value names? What are some of the metrics you're looking at?
Brian Culpepper: We're going to try to find stocks that have overall good strength, and overall good fundamentals overall, like a good price-to-book, or P/E.
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Kate Stalter: Basically you're screening for a lot of just the fundamental metrics. Nothing really exotic, just the basic fundamentals. What specifically might you be looking for? Something, for example, with a relatively low P/E…any kind of threshold you're looking at in that regard?
Brian Culpepper: We're going to try to find stocks that have a good overall relative strength, but also are very unloved by the world.
Again, we're just going to try to find stocks that have been neglected overall.
Kate Stalter: Tell us about a few of the holdings you have in the fund, then.
Brian Culpepper: A stock that we really love is Sturm Ruger (RGR). Again, as you guys know, they sell arms. Just in the past year, the overall background checks are back about 45,000, so there is a good overall flavor.
The other upside on that: It isn't followed by any actual analyst, either.
Kate Stalter: Interesting. I guess that's what you mean unloved, because I'm looking at a chart for this. It does show some fantastic price action, trading at new highs. But I guess the institutions are not so widely aware of it?
Brian Culpepper: No, it's been a small-cap. I mean as of now, it's about $637 million overall, and again that's after a nice huge upswing for 2011.
Kate Stalter: Any others you could tell us about today, Brian?
Brian Culpepper: The other stock that we favor is Vonage Holdings (VG). Again, it's an extremely small company, and they just cut their overall prices to compete with Magic Jack (CALL). And they brought out a brand new voice IP app that's going to be very favorable for any traveler overseas, where you will be able to call on your cell phone back to the States.
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Kate Stalter: I pulled up the chart of this one as you were speaking, and I notice this is kind of the opposite of Sturm Ruger, in that this stock really has been beaten up, price-wise. What's the upside you see in this one?
Brian Culpepper: It has great overall fundamentals, but as you said, strength-wise it has just been crushed. It is down about 46% over the past six months, but our outlook is that it has just been, I would say, slaughtered out there. With their overall pricing and with their brand new app out there, I think it's a very good play.
Kate Stalter: I'm also noticing the estimates are better going forward. Is that something else that you can factor into your models?
Brian Culpepper: Earnings are strong still. Overall, it just got hit by huge competition out there.