Quick Take: When the rest of the market has given up on a company, that’s when Jean-Pierre Conreur is likely to buy it, provided he sees what he calls “tremendous recovery potential” in its stock.
In managing the $85 million Tocqueville Small Cap Value Fund (TSCVX), Conreur scans for small companies whose stock is priced low compared to sales. To guard against owning perennial losers, he scans for those with strong balance sheets. He’s partial to companies whose managements own big stakes, and whose shares don’t show up on Wall Street analysts’ radar screens.
Results have been impressive. For the five years ended in December, Tocqueville Small Cap Value gained 19.8% on average, versus 12.3% for the average small-cap value fund. Last year, the fund returned 65.7%, versus 42.3% for its peers. Though the fund has taken on more risk than its peers, exhibiting wider swings in performance, turnover remains lower.
The Full Interview:
Jean-Pierre Conreur’s approach to money management goes a bit against the grain.
Whereas many stock pickers seek companies whose profits are rising, Conreur says he doesn’t even consider earnings. Half the holdings in the Tocqueville Small Cap Value fund that he runs are losing money, he says.
Nor does Conreur worry much about a business’s performance over one quarter or a year. He’s more concerned with its long-term prospects.
“I try to zero in on stocks that have been decimated by the market,” Conreur says. “I always tell my shareholders that I do not make any money, usually, the first year I own a stock,” he adds.
In picking stocks, Conreur looks for those priced low relative to a company’s sales, a ratio he believes provides the best indication of a business’s worth over the long run. He scans for shares whose price-to-sales multiples are near their historical lows over the last five or ten years.
Despite his bias towards deeply undervalued stocks, Conreur won’t go near troubled companies unless he thinks they have the potential to rebound over the next three to five years.
He wants companies with low debts and strong balance sheets. High inventory turnover is another characteristic he prizes, as is a company that’s not widely followed by Wall Street analysts, but whose stock is widely held by management. Conreur hunts for stocks among small companies. The market cap of the fund’s holdings averages about $834 million, he says.
Tocqueville Small Cap Value’s portfolio is concentrated. Conreur usually holds about 30-40 stocks, with the top ten typically accounting for 40%-50% of the fund’s assets.
“I am not a great fan of diversification,” says Conreur, who maintains that many actively managed mutual funds own so many stocks that they are virtually index funds. “I am managing the fund in such a way that I only need to pick a couple of good stocks a year to make money.”
One of his winners last year, Conreur says, was Westell Technologies`A` (WSTL), a telecommunications equipment maker whose stock rose about 29%.
Conreur likes the wireless telecom industry over all because he envisions it doing well if companies continue to beef up spending on technology. Elsewhere in the sector, he owns Powerwave Technologies (PWAV), which makes amplifiers for boosting cell phone signals.
As a typical holding for the fund, Conreur cites food processor Del Monte Foods (DLM). “It’s a stock that, really, nobody follows very closely,” but that company executives have been buying, he says. In addition, the company features a well-known brand name, and an attractive price-to-sales ratio that he hopes will expand within three years, Conreur says.
Valuation was part of what made auto parts makers Visteon Corp (VC) and Tower Automotive (TWR), the fund’s top two holdings, look good to Conreur. The fund manager also added Tower to the portfolio last September, a month after he bought Visteon, because he thought Tower’s sales could rise “substantially” thanks to orders it had booked.
His long investment horizon and desire to keep short-term capital gains distributions to shareholders to a minimum result in a list of investments that doesn’t change much. The fund’s turnover rate was 25% last year, compared to 69.6% for its peers.
Conreur exits a company gradually, moving out when the stock appears to be drifting from the value to the growth camp. Hefty insider selling and an unpromising change in a company’s fundamental business, like a bad acquisition, can also lead Conreur to trim or eliminate a holding.
– Richard Diennor