Quick Take: Jordan Alexander, lead manager of the Evergreen Small Cap Value Fund/A (ESQAX), focuses on companies whose bottom lines are suffering because of short-term difficulties. Potential earnings strength is more important to Alexander, who will buy a battered stock if he thinks its future is bright.
The fund has gained 5.6% so far this year. It returned 17.5% last year, while the average small-cap value fund was up 14.1%.
The $782 million fund is scheduled to close to new investors when its assets reach $900 million.
The Full Interview
“Under pressure” is a phrase Jordan Alexander uses frequently when discussing his investments for the Evergreen Small Cap Value fund. That’s because he typically looks for companies whose stock prices have been squeezed by some sort of temporary problem.
Alexander has no qualms about taking stakes in troubled businesses, provided he thinks they will work their way out of hot water.
A company’s bottom line tends to be hurting at the time he makes his initial investment, so he tries to identify a catalyst, such as a new product or management, that can “unlock its earning power” and boost the valuation of its stock, Alexander says.
Once he’s convinced a company has the potential to fatten its profits over the next 12 to 18 months, Alexander, who hunts for inexpensive stocks, seeks businesses with strong balance sheets and cash flow, and little debt. The Evergreen fund primarily buys domestic companies with market caps of less than $1.5 billion and holds usually 100-150 stocks.
Its No. 1 stock currently is Kenneth Cole Productions (KCP), a manufacturer of apparel, footwear and accessories. Alexander invested in the company about a year ago, when its stock and earnings were down because its products were out of fashion. He felt that if Cole could improve its merchandise mix, it could recover and generate about $2 per share in cash. The company now has no debt and $68 million in cash on its balance sheet, he says.
Ranked behind Cole in the portfolio are CNF Inc (CNF), a trucking company, and Spartech Corp (SEH), a plastics manufacturer that Alexander added recently. He sees both benefitting if the economy rebounds.
Two of his favorite stocks, Kaydon Corp (KDN) and Natl R.V.Holdings (NVH), also stand to gain as the domestic economy improves, Alexander says.
Kaydon makes custom-engineered parts for industrial, aerospace, medical and electrical equipment. The company has cut costs in recent years by restructuring, which should also help it improve profits significantly “over the next couple of years,” Alexander says.
National, which makes motor homes, had suffered because of production bottlenecks and an excessive number of models, but it is eliminating those problems, according to Alexander, who expects the company to break even this year and to turn profitable in 2003.
Economically sensitive banks and financial services companies carry the heaviest weight in the portfolio, accounting for about 19% of the fund’s holdings.
Among these stocks, Alexander particularly likes First State Bancorporation (FSNM), the largest bank holding company in New Mexico. First State’s units have “consistently” generated “double-digit” growth in deposits and loans, says Alexander, adding that the company could also become a takeover target.
Although undervalued stocks of small companies have done well since 2000, Alexander thinks they are still relatively attractively priced. Still, he concedes that “it was a lot easier to find bargains last year or the year before than it is today.”