Quick Take:Alexander Thorndike and his team at Century Capital Management Inc. look for companies with “strong franchise characteristics” for the Century Small Cap Select/Investor Fund (CSMVX). These include predictable, sustainable earnings growth, and a steady stream of revenue from existing clients.
The $25.6-million fund usually holds 40-50 stocks of small and medium-sized businesses and focuses on service companies, which Thorndike feels lend themselves particularly well to the kind of financial analysis his firm practices.
The fund generated a total return of 6.2% in the first quarter, versus 2.3% for the average small-cap blend fund. Century Small Cap Select, which began operating in February 2000, gained 5.9% last year, while its peers lost 3.2%. The fund has returned 29.1% since inception.
The Full Interview
Manufacturers don’t play a prominent role in the Century Small Cap Select Fund. The managers prefer companies that serve businesses.
In part, that’s because Alexander Thorndike, chief investment officer of Century Capital Management Inc., feels the firm’s skill in analyzing a service company’s books in particular gives a clearer picture of its financial condition than generally accepted accounting methods. His firm scrutinizes things like the extent that options dilute a stock’s value, and how businesses compute revenues and expenses, he said.
In addition, companies that do work for other businesses rather than make products tend to have the attractive valuations and growing profits that Thorndike, who’s known as Lanny, and the fund’s co-manager Allan Fulkerson prize.
“We’re kind of a quirky shop,” Thorndike said. “We describe ourselves, rightly or wrongly, as growth investors in value industries.”
One of those industries is health care, where the fund has the biggest chunk of its assets at 23%. One of its most recent investments in health care is Charles River Labs (CRL).
The Wilmington, Mass.-based company provides equipment for drug research. It also supplies mice, rats and other animals for tests. That segment of the business is likely grow nicely over time, according to Thorndike, who bought the stock about a month ago when it was priced lower than it is now. Charles River’s shares have been trading for $28-$29 lately.
Another company added to the portfolio this year is Philadelphia Consol Hldg (PHLY), an insurer Thorndike likes because it has made money in good times and bad over the last ten years. Thorndike, who declined to specify what he paid for any of the stocks he owns, said he bought a stake in the company last month and has seen the investment appreciate since then. The stock has been trading for $42-$43 per share in the last week.
Among his latest investments, Thorndike cited Online Resources Corp (ORCC), which he bought within the last month, as a favorite. The company provides Internet-based financial services, primarily to banks. Online Resources is generating cash, despite the bursting of the technology bubble. Although it is not posting earnings, Thorndike expects the firm to become profitable next year. In addition, the stock is trading at about 13 times expected 2003 earnings, a multiple Thorndike finds attractive.