Quick Take: Kevin Wenck, founder and president of San Francisco-based Polynous Capital Management Inc., considers himself an `opportunistic growth’ investor — he likes buying stocks when they’re in decline due to some temporary problem, as long as their underlying growth profile is sound.
Although his Polynous Growth Fund (PAGFX) had a tough year in 2002, dropping 40.7%, it has lately been coming on strong. For the six-months ended March 31, the fund gained 54.3%, making it one of the top performing funds for that period. For the three years ended in March, the portfolio lost 4.6% on average, versus a loss of 23.1% for its small-cap growth peers. In March, 2003, the fund’s star ranking was upgraded to 3 from 2.
Wenck has managed the portfolio since its inception in August 1996. Despite the recent outperformance and comparatively favorable three-year loss, the fund’s volatility, evidenced by its standard deviation and beta, is higher than that of its peers. In addition, the largest position in the fund stands at about 30% of assets.
The Full Interview:
S&P: What kind of stocks do you look for and how would you describe your style?
WENCK: We invest in U.S. stocks with market caps of between $50 million and $5 billion that we think can deliver annual revenue growth rates of between 15% and 30%. We seek to provide our shareholders with growth in excess of market averages, but at P/E’s below market averages.
We are opportunistic, somewhat `contrarian,’ investors. Although we are growth investors, we will not pay ridiculously high prices for our holdings. To illustrate, the fund’s average P/E is currently only about 12.9. Typically, our average P/E is at a 10% to 30% discount from the overall market P/E.
S&P: What about the timing of your stock purchases?
I will wait to purchase a stock until the price discounts every possible risk that I can identify. I’m not a `story-oriented’ stock buyer. Quite often, I will wait for some controversy to occur that will knock a stock’s price down by 20% or 30%, and buy it opportunistically.
S&P: Are there certain types of stocks that you will stay away from?
We will not invest in stocks that are growing in sales by more than 30% annually, because that would introduce too much risk and volatility. It would be a big gamble to think that any company can maintain such an anomalous growth rate. Moreover, these `aggressive growth’ stocks are highly vulnerable to price multiple compression.
S&P: Is your research proprietary?
We use our own complete financial models for our research, including our own earnings estimates, and stock target prices. We don’t use Wall Street buy ideas at all, and we don’t bother meeting with company managements.
S&P: You are trying to take advantage of inefficiencies in market pricing?
WENCK: Yes. Stock prices fluctuate much more than fundamentals do. The typical variation between the 12-month high and low of any individual stock is between 30% and 40%, whereas the market’s long-term rate of return is about 11%. Keep in mind that the statistical variability of earnings is relatively minimal. So as long as a company’s growth rates are sound, I will happily buy the stock when some event hurts its price.
For example, I recently bought some hospital stocks at 50% of where they were selling at six months ago. I also just bought some contract research companies trading at prices 40% to 50% of their 52-week highs. But I am not a `contrarian’ just for the sake of taking the opposite point of view — there has to be a fundamental integrity to these companies with temporarily depressed stock prices.
S&P: What does `Polynous’ mean?
WENCK: Polynous is ancient Greek for `many thoughts’, reflecting our philosophy that many factors are considered in our stock picks, beyond just the growth parameters. For example, say you have two companies which are each growing by 20% annually. One has no debt, the other has debt equal to 50% of capital. You wouldn’t expect to pay the same P/E for these stocks.
S&P: Are you strictly a bottom-up stockpicker?
WENCK: While there is no top-down element to our individual stock-picking and asset allocations, we do use top-down analyses to support the bottom-up research. I am primarily an economist, and my first task is to construct a reasonable framework for a company’s prospects, based on projections for the economy and for various industries and sectors. For example, if the overall U.S. economy is expected to see just 3% growth, I would be highly skeptical of a company that claims it can grow by 40% annually.
S&P: You have a wide latitude in market-cap size, from micro to mid-cap. What is the fund’s average market cap size?
WENCK: Currently, the fund’s average weighted market cap is about $1 billion. Typically, this figure ranges between $500 million and $1 billion. At the moment, we have a couple of larger-cap stocks, including Tenet Healthcare (THC), a $7-billion company, which skews our average cap size higher than normal. The fund has about $6.9 million in assets.
S&P: Do you use the Russell 2000 Growth Index as your benchmark?
WENCK: Although we are growth investors, we often dip into more value-oriented stocks. As such, we think the Russell 2000 Index is an appropriate benchmark for our fund.
S&P: What are your top sectors?
WENCK: We currently have about 32% in capital goods; 22% in health care; 21% in cash; 10% in consumer services; 7% in technology; 6% in business services; and 2% in consumer non-durables.