Quick Take: The Perkins family of funds consists of Perkins Discovery Fund (PDFDX) and Perkins Opportunity Fund (POFDX), which are run by Richard Perkins and his son, Daniel.
Both funds topped their peer groups for the fourth quarter last year. The Discovery Fund, with $8.7 million in assets, rose 20.5%, versus a 12.9% gain for the average mid-cap growth fund. The $14.5-million Opportunity Fund returned 29.6%, compared with 14.1% for its small-cap growth fund peers.
The two funds' 2004 returns also topped those of similar offerings. Over the longer five-year period, Discovery's return bested its peers, and has earned an overall rank of 5 Stars from Standard & Poor's, while Opportunity lagged during the period.
In selecting investments for both funds, the managers look for stocks that have been ignored by other investors for the most part, but that the two men think can pay off with help from a catalyst, like a product introduction. The two men buy profitable companies, as well those that currently aren't showing earnings but which they see as poised to move into the black.
The Full Interview:
The aim of the Perkins Discovery Fund is to find companies that have been largely overlooked by the market.
Richard Perkins, who manages the portfolio with his son Daniel, doesn't scan for stocks that aren't widely followed by Wall Street, but many of the ones they invest in fall into that category, he says. Of course, that can pay off when mainstream analysts begin tracking and touting something they own, Richard says.
The two men will buy growing companies as well as shares they think are undervalued. While they want to own financially sound, profitable companies, they're willing to bet on those that aren't generating earnings if they think that situation will change.
Stocks that have broken out after being stuck in a trading range for an extended period pique the managers' interest, too. In addition, they want managements with successful track records.
A key element of their buying criteria is identifying a catalyst, like a new product or management, that can boost a stock.
About half the companies the managers buy are based in the upper Midwest, Daniel says. The managers, whose office is near Minneapolis, lean towards businesses in the region because their executives can be reached relatively easily, and because the pair can follow company news in local papers.
"There's nothing we hate worse than missing a stock or missing an opportunity in our own backyard," says Richard. "It just irritates us."
About 50 stocks make their way into each of the funds' portfolios. That number provides adequate diversification while enabling winners to make significant contributions to performance, the elder Perkins says.
"When you have too many names, it's much more difficult to achieve outperformance, in my view," he says.
In November, the fund took a stake in Granite City Food & Brewery Ltd. (GCFB), a small chain of restaurants that feature on-site breweries. The company uses a central brewery to partially produce beer, which is then transported to each restaurant, where the process is completed. This helps contain costs, Daniel says.
Granite City has cash on its balance sheet, and although its bottom line is in the red, the managers expect it to start earning money in a year or two.
Richard cites Cash Systems Inc. (CKN) as a favorite stock. The company provides check cashing services, automatic teller machines, and credit and debit card cash advance products to gaming companies and retailers. Because the casino industry is expanding, he thinks Cash Systems "has a huge amount of potential," he says.
Cash Systems' quarterly revenues went from $2.5 million two and a half years ago to nearly $13 million at the end of the third quarter last year, Richard says. The company became profitable in 2003, and it's expected to post earnings of about $0.16 per share when it reports its 2004 results, he adds.
One of the fund's biggest winners last year, the managers say, is First Cash Financial Services Inc. (FCFS), which operates pawn shops and makes so-called payday loans, that is, short-term cash advances against paychecks. The fund's First Cash shares cost $5.50 on average; the stock ended the year at $26.50 and has been trading for $24.50 lately.
The managers say Discovery's 2004 returns were also lifted by Navarre Corp. (NAVR), a publisher and distributor of digital music and video products that was the fund's No. 1 holding at the end of the year.
Stocks that appreciate too much become candidates for sale, however, the managers say. For example, last month they unloaded Digital Angel Corp. (DOC), which markets products for tracking people, animals and objects, because its shares had run up, Richard says.
The managers, however, are still following the company, whose executives are slated to visit them today, he says.
"If the stock goes back down enough, we could very well just repurchase it," he says.
Contact Bob Keane with questions or comments at: email@example.com.