Quick Take: In managing the Pacific Advisors:Small Cap Fund/A (PASMX), George Henning holds a concentrated portfolio of small companies. He focuses on undervalued stocks of companies he thinks have the potential to grow profits and sales by at least 10% to 15% over two to three years. To gain entry to the fund, a company also has to have a business plan that Henning judges to be sound.
Henning guided the $10.2 million fund to a total return of 83.2% last year, well ahead of the average small-cap value fund, which gained 42.3%, and the Standard & Poor’s 500 index, which rose 28.7%. For the three years ended in December, Pacific Advisors Small Cap returned 14.3% on average, while its peers advanced 12.6%, and the index retreated 4.1%.
The Full Interview:
George Henning, the manager of the Pacific Advisors Small Cap Fund, has been keeping his eyes peeled for transportation stocks in recent months. He reasons that they’re likely to benefit if the U.S. economy continues to improve, leading companies to ship more materials and goods.
Last June, Henning began investing in a pair of trucking firms, SCS Transportation (SCST), and U.S. Xpress Enterprises`A` (XPRSA). He thinks earnings for both can increase by 10%-15% over the next year. Henning, who prefers companies with what he judges to be sound business plans, also was impressed with the one put together by U.S. Xpress.
Henning started buying shares of both companies at around $11. U.S. Xpress stock closed today at $13.20. SCS, a former unit of Yellow Corp. (now Yellow Roadway (YELL)), closed at $17.76.
Transportation stocks account for the biggest piece of Pacific Advisors Small Cap’s assets — 17%. Elsewhere in the sector, Henning owns RailAmerica Inc (RRA), a railroad company that has been in the fund since 1994 and was ranked second in the portfolio at the end of last year.
RailAmerica, which operates short and regional lines in the U.S., Canada, South America and Australia, is the No. 2 player in its markets and has a history of making acquisitions that fatten profits, Henning says.
Although Wall Street has had concerns about the company’s debts, Henning says he’s confident it can service them. As part of its strategy to pay off bills and grow its North American business, RailAmerica today agreed to sell its 55% stake in Ferronor, a Chilean railroad, to its partner in the venture for $18.1 million.
In picking stocks, Henning looks for small companies that appear capable of growing their top and bottom lines over at least 2-3 years.
“I want to buy a stock when I think it’s pretty cheap,” adds Henning, who hunts for shares priced low compared to a company’s earnings, sales or book value. Beyond that, Henning likes companies that lead or dominate their industry or niche. He also favors those with little or no debt and that generate sufficient free cash to meet their obligations and fund growth.