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VIDEOBuffett Devotee Mines Small Caps for Winners
By
Josh Lipton May 21, 2010 3:00 pm
Pinnacle Value portfolio manager John Deysher looks for success among the small caps, discussing some of his top stocks.
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“We are bottom-fishers here looking for the big lunkers down near the bottom and we have an 80-pound test line,” Deysher says. “So, once we get one of those lunkers, through patience and skill and knowing where they are, we don’t want to lose it. “
Deysher, with 25 years of investment-management experience on his resume, has worked as the portfolio manager of Pinnacle Value (PVFIX) since its inception in April 2003. There, he applies a Warren Buffett-style approach to investing, concentrating on valuation, solid balance sheets, and strong management.
Deysher’s specialty is the small-cap space -- the average market value of his holdings is $400 million -- but the 54 year old remains flexible when it comes to spotting opportunities, tiptoeing across the capital structure for the best money-making investments whether that’s in preferred stocks or closed-end funds.
Through May 20, the fund’s five-year annualized return of 7.08% bests the Russell 2000 as well as handily leads its Morningstar peers by 4.99 percentage points, landing in the top 8% of the category.
Morningstar awards the fund five stars, its highest rating.
Pinnacle Value, with $63 million in assets, has an expense ratio of 1.47% and requires a minimum investment of $2,500.We spoke with Deysher recently about his strategy, top picks, and how he applies Buffett’s investment principles to his own stock selection process.
Minyanville: Walk us through your investment strategy. What do you look for in a stock?
John Deysher: When you are trafficking in small- and micro-cap-type merchandise, companies must have strong balance sheets to get them through the difficult times they might have if the economy doesn’t cooperate. We look for companies where managements own a big chunk of the stock. We want their interests aligned with ours. And we want companies that have vibrant business plans, which have a strategy in place to grow and enhance shareholder value.
Minyanville: It’s also a value-oriented strategy?
Deysher: Yes, we use traditional valuation metrics such as discounts to book value, low PE ratios, low price-to-cash flow ratios. Our purchases normally fall into one of four buckets: undervalued assets where the stock trades at a big discount to liquidation or private market value; turnarounds or companies that are rebounding from depressed operating results; companies growing at a reasonable rate that can be acquired for a reasonable price; and special situations which could be spin-offs, reorganizations, and liquidations.
Minyanville: So out-of-favor companies with strong balance sheets and strong management? This is a strategy Warren Buffet would appreciate.
Deysher: Well, he is our idol. We try and take what he does with much larger companies and apply it on a small- and micro-cap basis.
Minyanville: Are there ways in which your investment process differs from the Oracle of Omaha?
Deysher: Buffett says he is a combination of Benjamin Graham, who he studied under at Columbia, and Phil Fisher, who emphasizes buying quality companies and not being afraid to pay up for them. On that spectrum, we are probably a little closer to Graham. But we will still look at high-quality companies at reasonable prices.
Minyanville: What don’t you want to see in a stock? What are the red flags for you?Deysher: There are three: leveraged balance sheets; companies that are beyond our circle of competence, which is also something Buffett talks about. We generally can understand most industries, but there are some where we can’t, like biotech. Finally, we look for companies that exhibit good corporate governance.
No positions in stocks mentioned.
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