Identifying stocks with growth prospects

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Transcription of Finance News Network Interview with Fairview Equity Partners Executive Director and Portfolio Manager, Chris Adams

Clive Tompkins: Hello Clive Tompkins reporting for the Finance News Network. Joining me from Fairview Equity Partners is Executive Director and Portfolio Manager, Chris Adams. Chris welcome back.

Chris Adams: Pleasure to be here.

Clive Tompkins:The Fairview Emerging Companies Fund is a smaller Companies Fund. Where do you look for your investments?

Chris Adams: We look for any companies which are outside the top 50. We can’t invest in the top 50 companies and any companies with a market cap of about $60/70 million. Anything below that is a bit too small for us. We don’t rule out any potential sources, we go to a number of presentations, site visits and we have a number of companies come through our offices. Over the reporting season we would have had about 60 to 70 companies come through our office. We read all the financial press and will take a tip from anywhere we can find it.

Clive Tompkins: The Fund aims to identify companies yet to be fully discovered by the market, or underestimated. Can you give us an example of one such company within your portfolio?

Chris Adams: A classic example of a company like that is a company called Vita Group Limited (ASX:VTG). They’re not covered widely by the investment broking community, I think only one or two brokers cover them, market cap’s about $100 million. It’s on a very cheap multiple for its growth prospects, on about 10 to 12 times. And this company’s got a lot of growth from rolling out Telstra (ASX:TLS) stores. They’ve got about 90 Telstra stores and they’re going to take that over 100 and they sell Apple Inc. (NASDAQ:AAPL) products, mobile products, fixed broadband etc. It’s a high growth segment as well and we think that’s a very exciting growth company opportunity.

Clive Tompkins: How’s the Fund performed over the September quarter and further back?

Chris Adams: Over the September quarter, about one per cent ahead of our benchmark, which is reasonably consistent with our longer term objectives of adding about four to five per cent per annum, over the benchmark. Over the longer term we’ve done a lot better than that, we’ve added about 15 per cent before fees per annum since our inception.

Clive Tompkins: Which stocks have been standout performers in recent times?

Chris Adams: The stocks that have really performed well over the last quarter and a bit, have been technology stocks and we certainly own a lot of those in the Fund. Examples of that are VTG which I mentioned before, Infomedia Limited (ASX:IFM) which is an electronics parts software cataloguing firm, nearmap Limited (ASX:NEA) which does aerial photography, far more advanced than Google Maps for instance. And a couple of agricultural stocks, Select Harvests Limited (ASX:SHV) which is primarily almond manufacture and distribution. And the almond price has been very strong, and that’s driven a very strong rerating in the Select Harvest price. Other than that there haven’t been any obvious pockets of strength.

Clive Tompkins: The Fund has about 60 positions within the portfolio. Which sectors are you weighted towards?

Chris Adams: So the six we’re weighted towards are as I mentioned before, technology, also healthcare we’re pretty strong on. And Sirtex Medical Limited (ASX:SRX) is an example of a company we own in that space, as well as Alchemia Limited (ASX:ACL) and Mayne Distribution (ASX:MYX). The other sector we own at a reasonable weight in is the retail sector. We own a number of selective retailers including Flight Centre Travel Group Limited (ASX:FLT), Beacon Lighting Group Limited (ASX:BLX), Vita Group Limited (ASX:VTG) which I mentioned at the start of the interview. And they’ve got some good strong stock specific characteristics which we like. We don’t particularly like the discretionary aspects of the retail sector, but there are some good companies within that sector that we’re attracted to.

Clive Tompkins: On the flip side, which sectors are you steering away from?

Chris Adams: The clear area of concern for small caps is any mining related companies, and we’ve seen how weak commodity prices have been of late. And we’re seeing announcements almost on a daily basis now, of the big mining companies cutting back their capital expenditure. BHP Billiton Limited (ASX:BHP) said the other day, there would be no major new mines in coal for a number of years, and that’s been replicated elsewhere as well.

We’ve seen a number of huge profit warnings coming out of mining services related stocks. We saw Ausdrill Limited (ASX:ASL) the other day knock their earnings back by another 30 to 40 per cent, after a series of downgrades prior to that. Some of these companies are now having very strict balance sheet concerns, and earnings have plummeted to sort of very minimal levels. We own very little in that space.

Clive Tompkins: Last question Chris, equity markets have seen some turbulence recently. What’s your outlook for small caps over the next six
months?

Chris Adams: We think the outlook’s reasonable. Valuations are more supportive now after the retracement we’ve seen in the last couple of months. Small cap industrials on about 13 times now, having been up to about 15 times a few months ago. So that’s somewhat more appealing, but the earnings outlook is still challenging. We’ve seen a number of profit warnings lately; we talked about mining services, still a reasonable component of the benchmark.

Retails a big component to benchmark and we’re seeing some pretty soft consumer spending coming through. But there are a number of IPOs coming through which seem to be more attractively priced now. And as I mentioned during the interview, there’re a number of interesting stock examples which we’re still pursuing. So we think it’s a reasonable outlook for the small companies benchmark.

Clive Tompkins: Chris Adams, thank you for the update.

Chris Adams: It’s been my pleasure and thanks for having me.

Ends