Quick Take: What distinguishes inexpensive stocks from one another is a company’s performance in the long run, says Christopher Leavy, who helps run Oppenheimer Small Cap Value/A (QVSCX).
In picking undervalued stocks, Leavy and lead manager John Damian look for companies they think stand the best chance to increase earnings and cash flow over a period of three years.
Since taking the reins of the $666 million fund about three years ago, Leavy and Damian have kept it ahead of similar offerings. Damian attributes that partly to an overhaul of the portfolio carried out by the pair, who decreased the fund’s holdings and eliminated growth investments. Adding a trio of analysts to the fund, which Damian says had none previously, has also helped boost its performance, he says.
Oppenheimer Small Cap Value gained 46.1% in 2003, versus 42.3% for the average small-cap value fund. For the three years ended last year, the Oppenheimer fund returned 13.6% on average compared to 12.6% for its peers.
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The Oppenheimer Small Cap Fund has undergone more than a few changes in the last three years.
Since they began managing it in 2001, Christopher Leavy and John Damian say they have shrunk the portfolio to 70-100 holdings from 500 and culled its growth stocks, leaving it focused on companies whose shares appear undervalued.
The transformation extended to the fund’s management team, which previously had no analysts but now gets assistance from three, Damian adds.
“We took about five or six months to kind of really get it into order,” Leavy says, referring to the face lift.
Leavy leads Oppenheimer’s value team, which oversees the Small Cap Fund and four others. Damian is primarily responsible for Small Cap’s investment decisions.
Initially, Small Cap’s managers use a computer program to screen for stocks with valuations lower than that of the Russell 2000 value index.
Next, they look for companies with the potential to produce better-than-expected earnings and increased cash flow over the long term. “We think what really separates cheap stocks from each other is how the businesses unfold over the next three years or so,” Leavy says.