Value Investing: Two Sectors You Must Know

Brian Frank: Absolutely. I think the fact that we have been so far from investors' thoughts—the savvy investors—usually means we are at the bottom of the value cycle. It is a fantastic time to start looking at fundamentals.

Most of the value gurus I follow are trailing the market this year, including ourselves, and a lot of growth and momentum stocks are clearly in favor. Just by focusing on the numbers and running a strategy based on valuation, we are finding a lot of compelling ideas, a lot of things that haven’t moved in the bull market, and a lot of smaller stocks especially, that have gotten left behind.

The fundamentals look great, the business line and the stock prices look great, and I think a lot of these small stocks are ripe for buyouts too.

Gregg Early: You’re fairly secular in what you’re looking for. I mean you don’t care whether it’s large-cap value or small-cap value or mid cap for that matter. Is that correct?

Brian Frank: Correct. We run an all-cap strategy just for the simple idea of if you’re running your own money, why would you limit yourself into one space?

If all large-cap stocks are expensive and you’re a large-cap manager, you have to buy those stocks. That just never even made sense to me because we started with family money, even before we had the fund, and the idea was "make money in the stock market." It wasn’t built to fit a style box.

So by having an all-cap fund, our universe is about 3,500 stocks, which is larger than the universe of almost every major fund company out there. We are looking for the best 25 to 40 stocks that are extremely low in valuation, but have extremely high returns on capital.

Of course, we do a bunch of qualitative metrics that we check on from there as well. We are trying to build a concentrative portfolio that can outperform the S&P (INDEXSP:.INX), because I think in order to beat an index, you can’t look like one and own hundreds of stocks like many other funds do.