Quick Take: In picking stocks for the AIM Small Cap Equity Fund/A (SMEAX), lead portfolio manager Paul Rasplicka looks for small companies with growing top and bottom lines whose stocks seem undervalued.
Rasplicka and co-manager Michael Chapman also like to find companies with strong balance sheets and cash flow, and whose quarterly results exceed analysts’ estimates. Rasplicka also helps pilot the AIM Capital Development Fund/A (ACDAX), which invests in mid-sized companies.
The Small Cap Equity Fund, which started operations in August of 2000, returned 40.5% this year through November, while its peer small-cap value funds gained 37.3% and the Standard & Poor’s 500 index rose 22.3%. The AIM fund rose 10.1% on average for the three years ended last month, compared to similar funds, which returned 14.3%, and the index, which slid 5.5%
The fund is set to close to new investors when its assets, which now total $496 million, reach $500 million.
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Paul Rasplicka belongs to that group of money managers who look to own growing companies whose stocks appear reasonably priced, a practice known by the acronym GARP.
“Hopefully, we can buy them when the market is not giving them credit for the strength of their business,” or they’re temporarily out of favor for some other reason, Rasplicka says of his fund’s investments.
In addition to inexpensive shares, Rasplicka seeks companies with solid balance sheets, strong cash flow, and good returns on capital. In addition, he favors those for which analysts raise estimates and that exceed those expectations. Companies that are increasing their share of a growing market will pique his interest, too.
The fund typically owns 100 companies with market caps of $200 million to $1.5 billion, and normally limits position sizes to 1% to keep damage from losers to a minimum. “It’s just a way to manage volatility through diversity,” Rasplicka says.
Late last month, the fund bought shares of Digital Insight (DGIN), which provides information technology services to banks and other thrift institutions. Digital Insight’s profits are expected to increase by 45% next year, but it’s shares trade at about 25 times projected earnings, Rasplicka says, adding that its returns on equity and margins are improving.