The Small Cap Investing Strategy I Used as a Hedge Fund Manager

Fellow Investor, Bret Jensen from Investors Alley here again. Hopefully by now you've read my Top 5 Turnaround Stocks report that I sent you. You're probably wondering: "Why should I listen to this guy, and how is he different from everyone else?" I'd like to give you a very brief overview of who I am and why you might find me worth listening to. I am the Lead Analyst for Investors Alley's Small Cap Gems newsletter. I'm also a regular columnist for TheStreet and one of the most read contributors on Seeking Alpha, where I have amassed over 19,000 followers. My no-nonsense approach to investing has rewarded individual investors like you with double and triple digit returns even in this volatile market. It is the reason I was recently ranked in the "Top 100" out of over 7,000 financial analysts and bloggers by TipRanks, an independent ranking service. Previously I was Co-Founder and Chief Investment Strategist for Simplified Asset Management, a long/short hedge fund that was in top five percent of long/short hedge funds for total returns in its first full year (2009) as ranked by Hedgeco. I am a 20-year financial services leader who seeks value opportunities balanced with managed risk. And now I’ve turned my attention to running a new kind of small cap research advisory service. My investment philosophy is different than most retail investors and many other fund managers. First of all, I do not use filters to screen for possible investments using metrics such as price to earnings, price to revenues or some other criteria. Doing so can be useful but it also can miss big winners that can make your portfolio outperform the market over time. Filters are not going to find the small biotech with no revenues that has several promising drugs in late stage trials. They will not pick up the small exploration and production concern that has just started to produce results on its undervalued shale acreage or a homebuilder that was prescient enough to pick up substantial land holdings when it was selling at rock bottom prices after the recent financial meltdown. The other thing I never do is to chase momentum stocks or the flavor of the month. Yes, this means I will usually miss the next Salesforce, but I will also not have implosions like Webvan or Pets.com in my portfolio either. It is a tradeoff I have no problem in accepting. Allow me to explain how I find winners and how you can too. Start with research others have done for you My investment process starts with a voracious amount of reading to glean new possible lucrative investments. I go through a large amount of analyst reports from individuals with a good track record on a weekly basis, read bloggers that have provided solid small cap picks in the past as well as overviews on specific industries to get good starting points for possible new investments. What's the company saying about itself? I then read through the company's latest conference call transcripts, press releases and investor presentations to get familiar with the company's businesses and strategies. Then the deeper research occurs. I am looking for two things when I am sizing up a stock to add to my portfolio. First, I need to determine whether the value of the company's businesses are undervalued significantly by the market either through ignorance or because sentiment on the stock or sector has become too negative. Often companies have assets I call "hidden gems" that most investors are not aware of. One of the easiest of these common hidden gems is net cash on the balance sheet and can be overly discounted even on the largest of companies. A great example of this is Apple back at its recent nadir in late June of 2013. At its bottom, the company had over $160 billion in net cash and marketable securities on the books. This was over a third of its market capitalization at the time. Taking out net cash yielded an equity that was selling for just six times forward earnings; a deep bargain in the market. The shares are up more than 60% since that time and the stock was a huge winner for my portfolio and readers. Other hidden gems are not so obvious. Sometimes they consist of unrecognized but valuable patents, property acquired decades ago severely undervalued by book value, upcoming litigation awards or just a company that has various solid businesses but is trading with a "conglomeration" discount to what the individual assets would be worth as stand-alone entities. What will make the stock pop? The next thing I look for is a catalyst (s) to unlock the true value of these hidden assets. This can come in the form of new management or a different strategic direction at the company. Often it is driven by an activist fund that comes on board and pushes hard to make moves that will increase shareholder value. One of the reasons for Apple's huge rally over the past year is that activists were successful in getting the company to use its huge cash hoard to initiate dividend payouts as well as a huge stock buyback program to return excess cash to shareholders. Another great example is what happened at energy mid-major Hess Corp when activist Elliott Management took a significant stake in this energy conglomerate back in late 2012. This company had underperformed its brethren for over a decade and was a hodgepodge of underperforming businesses. Elliott successfully pushed for Hess to spin off or sell its non-core refinery operations, gas stations and non-optimal energy acreage. The company was able to pay off debt, up its dividend and invest in growing production from its best assets. The results have been felt by shareholders who have seen their shares more than double since Elliott became an agitator for change. Although this seems a simple investment philosophy it takes discipline, lots of research and years of experience to consistently execute successfully. Luckily the market has always been my passion and uncovering an overlooked equity that then provides outsized returns over time is a thrill that never gets old to me. I hope I was able to provide some insight into my Wall Street background and investing strategy. Join my Small Cap Gems service today to see this approach in action and get the names of the stocks I think have the most potential for double or triple digit gains in a matter of months. Sincerely, Bret Jensen Lead Analyst, Investors Alley P.S. For a limited time, I'm offering a special Charter Member rate for new subscribers. It's 50% off the normal rate with a full 60-day refund guarantee if you're not happy for any reason. There's no obligation on your part. Click here for more details.

 

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