Quick Take: After three straight annual losses, the Armada Small-Cap Growth Fund/A (ASMGX) has rebounded. The fund, which has total assets of $224 million, was up 40.9% this year through October, compared with the average small-cap growth fund, which gained 39.1%.
Previously, the fund suffered because the growth stocks it leans towards were out of favor with investors, says Jon Scharlau, the fund’s lead portfolio manager.
Scharlau attributes the turnaround in part to a quantitative model his team began using for stock picking shortly before he came on board in February. The computer model screens for growing companies that have the financial strength to keep expanding for at least two years.
The managers also blend fundamental analysis into their research, and consider economic conditions in setting sector weights. Recently, 41% of the fund’s holdings were technology stocks.
The Full Interview:
In picking stocks, the team that oversees the Armada Small-Cap Growth Fund starts with a quantitative model.
The computer program screens for companies for which analysts’ estimates are increasing and that beat those expectations. Stock price movements are tracked to see if they, too, are rising.
Balance sheets and related factors are analyzed to gauge a business’s financial strength and to get an idea of how long it can continue growing. The idea is to find companies that can expand for two years in a row. When it comes to bottom lines, the managers like to see them increase by at least 15% annually, Scharlau says. Two other key criteria are fairly heavy spending on research and development, and low debt.
In addition, the model takes into account valuations, like a stock’s price compared to a company’s earnings, sales and cash flow. “Cheaper is better,” Scharlau says of the multiples the managers hunt for. He adds, though, that “we’re not looking for cheap stocks.”
After crunching numbers, the team, which consists of four portfolio managers and an analyst, try to judge the health of the economy, as well as where individual companies are in their profit cycles, in order to determine what industries to invest in and how heavily.
Competitive advantages or leading market positions, and managements with successful track records, are other things Scharlau and his colleagues like to mark off on their check list, as are catalysts, such as new products, that can help boost a stock.