Quick Take:James Margard, lead manager of Rainier Investment:Small/Mid-Cap Equity Portfolio (RIMSX), hunts for growing companies whose shares he considers reasonably priced in the small- and mid-cap space.
In picking stocks, Margard and the other members of his team trawl for companies whose bottom lines are fattening faster than their competitors, but whose shares are cheap compared to their own history, their peers, or the overall market.
That approach led the $539-million fund to a 13.4% total return for the 1-year period through Jan. 31, 2005, versus a gain of 10.0% for the average mid-cap blend fund. For the five years ended in January, the Rainier fund gained 8.4%, on average, versus 6.6% for its peers.
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Before gaining entry into the Rainier Small/Mid Cap Fund, companies have to grow profits faster than others in their industry or sector.
Along those lines, lead portfolio manager James Margard and the other members of his team are keen on earnings estimates that get revised upwards either by the company itself, or analysts.
Valuation is another key factor in determining whether or not a stock gets bought. The team wants shares that are priced low relative to their own history, or their peers and the market.
The stock pickers prefer businesses with little debt and sufficient cash flow, enabling them to pay dividends, buy back shares or make acquisitions.
The team also scans for companies with strong competitive positions. Then they look for a catalyst, like a new product or a restructuring, that can boost a stock.
The fund invests in companies with market caps of $100 million to $12 billion, and keeps between 95 to 130 of them.
Margard cited American Pharmaceutical Partners Inc. (APPX), one of the fund’s biggest holdings, as an example of the kind of company it buys.
The stock had been volatile in recent months as investors weighed whether or not the drugmaker would get approval from the Food and Drug Administration to sell a re-engineered, less toxic form of the breast cancer treatment Taxol. The okay for American Pharmaceutical’s Abraxane product came through last month, helping the stock to move higher, said Margard. He expects further improvement in the company’s bottom line, and sees earnings doubling this year, and rising another 30%-35% in 2006.