At Schwab Impact, a PM Searches for Mispriced Equities

Sam Dedio of Artio Funds says 'there's still value out there'

Sam Dedio and his team of analysts at Artio Global Management spend their time looking for “equities that are mispriced” for inclusion in one of Artio’s four mutual funds, and he’s convinced that “there’s still value out there” to be found.

One way the team finds those stocks is for every analyst to visit at least eight companies a month, talking “over and over again with management teams” in specific sectors, visiting competitors and suppliers to those companies, looking especially for those firms that have a product or service that has the potential to “change consumer or corporate buying behavior,” and those with superior human capital.

In an interview at the Schwab Impact 2010 conference in Boston on Wednesday, Dedio says he “doesn’t care about GDP,” but rather about those companies his team is evaluating “which will outperform.” With a current focus on the small-cap sector, Dedio says that the average small company is deriving a higher percentage of its revenue overseas, since localizing a presence in foreign market is much easier, citing how quickly even a small company can set up a foreign-language website and fulfill orders through that website.

As for ways to increase what he calls an economic recovery that is “low quality,” Dedio believes that “anything that boosts confidence will help with unemployment,” which is why he says its important to watch the weekly unemployment claims numbers. “You want to see that claims number fall below 450,000,” he says.

(The Department of Labor reported Oct. 28 that the four-week moving average of unemployment claims for the week ended Oct. 23 was 453,250, down 5,500, while the seasonally adjusted one-week number was 434,000, a decrease of 21,000 from the previous week.)

Dedio argues that the best small companies that will be the “winners tomorrow” are those that were willing to preserve their internal structures during the recession, and that he believes a good screen to help determine those “winners” will be companies that had low operating margins but good gross margins. Such firms will be able to grow when the overall economy improves, or become a good takeover prospect.

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