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How to Get Big Returns From Small Stocks


Longtime pro Bill Nasgovitz shares his top picks.

A 40-year veteran of small-cap investing, Bill Nasgovitz never used to concern himself much with the broader macro picture of the US economy. A dedicated, bottoms-up value investor, Nasgovitz simply concentrated on what he did best: finding successful pint-size companies trading at bargain basement prices.

Now, that's changed.

"Our collective financial health is a mess," Nasgovitz tells Minyanville. "And it doesn't seem to matter to our elected officials. They're more worried about water-boarding than setting Social Security, Medicare, and entitlements on sound financial footing. The macro picture is so faulty."

For Nasgovitz, the fiscal fiasco in Washington has created tension and frustration. Still, the 65-year-old founder, president, and portfolio manager of Heartland Advisors, which manages more than $3 billion in assets, continues to successfully spot opportunities for his clients.

Nasgovitz buys stocks based on a set of 10 criteria, rooting out companies with strong financial profiles and low prices relative to their earnings, cash flows, and book values. Morningstar fund analysts say that the fund he captains, Heartland Value (HRTVX), is one of the oldest and best micro-cap funds out there.

Through October 31, the fund generated a 10-year annualized return of 10.16% versus 7.53% for its benchmark, the Russell 2000 Value Index. This beats its Morningstar peers by 2.54 percentage points, or 83% of its rivals.

The no-load fund, with $1.2 billion in assets, has an expense ratio of 1.20%, and requires a minimum investment of $1,000.

We recently called Nasgovitz at his office in downtown Milwaukee to talk about the stock market, his top picks like The Ensign Group (ENSG), InterDigital (IDCC), and China-Biotics (CHBT), and what wind surfing has to teach us about investing.

Minyanville: Explain the fund's objective and your investment approach for us.

Bill Nasgovitz: The fund is a small- and micro-cap fund. We want to take advantage of capital appreciation within this very dynamic sector of the stock market. So we are trying to capture the upside potential of small- and micro-cap stocks, and limit the downside risk through basic value, Graham and Dodd investing. Back in the bear market of 1973, I came up with a 10-point check list to find cheap stocks with safety nets to protect capital over both the short term and long term. The fund is now finishing its 25th year.

Minyanville: What's the average market cap of the holdings?

Nasgovitz: We have a barbell approach. About half of the portfolio is in small stocks, which we define as over $300 million in market cap, and the other half is in micros, under $300 million. We have 157 issues in the fund. The median market cap is $147 million. Our average weighted market cap is $620 million.

Minyanville: How important is management to you?

Nasgovitz: It is one of the criteria we use. It is a difficult undertaking, to gauge management's future success. We look at their past history of success, how much skin they have in the game, and compensation. We also talk to employees at the firm, to get a sense of how the place is run. There are 14 of us on this team. We will see 1,000 companies this year. So we do a lot of on-site research. We get out in the field.
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No positions in stocks mentioned.
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