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December 12, 2003 at 07:00 PM
Dec. 9, 2003 — The Berwyn Fund (BERWX) gravitates towards cheap stocks, but that doesn’t mean it can’t kick up its heels with businesses whose profits and sales are rising, says portfolio manager Robert Killen.
“We don’t think that value investing negates the ability to buy companies that are growing,” Killen says of himself and Lee Grout, who came on board as Berwyn’s co-manager in late 2001.
Killen, who has run the fund since its inception nearly 20 years ago, says he won’t touch a stock unless he thinks he can double his money in it over three or four years.
“We’re looking for triples and home runs,” he says. “We’re not looking for a lot of base hits.”
Although Berwyn stumbled rounding the bases in 1998 and 1999, and again in 2002, it has been on a winning streak lately. The $37.4 million fund returned 40.8% this year through November, while its small-cap value fund peers were up 37.3%.
In picking stocks, Killen and Grout look for those priced low compared to the company’s earnings and free cash flow, or that are trading for less than the business’s intrinsic value.
Killen has no hard and fast targets for earnings and revenue growth, he says, adding that he is more concerned with spotting strong returns on equity and invested capital.
Sound balance sheets and low debt levels are on the managers’ check list, too. Companies whose executives have a sizable equity stake in the business will pique their interest as well. Killen and Grout also want to find companies with leading market shares or other competitive advantages.
As a rule, the fund hunts for companies with market caps of $125 million to about $300 million, Killen says, but it currently holds a few with caps of about $1 billion.
The managers typically limit the portfolio to 40-45 stocks to facilitate analysis, according to Killen, who says he and Grout do all their own research.
Despite their bias towards cheap stocks, the managers are willing to own relatively pricey ones if a company seems to fatten its top and bottom lines faster than its competitors, Killen says.
For example, take EPIQ Systems (EPIQ), which makes software for lawyers and companies involved in bankruptcy proceedings. The stock is trading at about 19 times projected 2004 earnings for the company, says Killen, who concedes that’s a bit higher than he would normally prefer. However, the multiple is merited in light of the company’s “very commanding position” in its field, says Killen, who notes that EPIQ is the only publicly traded company of its kind.
