Gordon, who formerly worked at Chuck Royce’s small cap-focused Royce & Associates, has parlayed that experience into her own niche: a concentrated portfolio of no-more than 35 small-cap holdings. Most investors in the small-cap space mitigate potentially erratic returns by diversifying and holding far more companies. Gordon, by contrast, takes the more intrepid approach by investing only in her highest conviction ideas and only selecting stocks she believes have the potential to go up 50% or more in the following two years.
“Thrift, fearlessness, resilience, hard work, intellectual curiosity and an ability to take and avoid risk are in my blood,” she says in her firm’s bio.
Her mastery of this strategy has helped her firm net only three down years since inception. On an annualized basis, it returned 12.1% for small cap since inception, versus 7.6% for the Russell 2000. Assets under management have also swelled to $2.1 billion.
Investing Process Breakdown
Daruma’s investing process consists of several steps:
1) Generate new ideas systematically.
2) Understand the past.
3) Weigh future outcomes.
4) Define the investment thesis.
5) Monitor portfolio holdings.
6) Sell in light of price targets, new opportunities and portfolio risk.
In the second quarter, Daruma bought 15 new stocks, for a total portfolio of 73 holdings. They currently like technology, weight it at 26.8% of the portfolio. Consumer cyclical has the second greatest weighting at 24.6%.
The five largest holdings purchased in the second quarter are Monro Muffler Brake Inc. (NASDAQ:MNRO), Carrizo Oil & Gas (NASDAQ:CRZO), Texas Capital Bancshares (NASDAQ:TCBI) and Volcano Corp. (NASDAQ:VOLC).
Monro Muffler Brake Inc. (NASDAQ:MNRO) is a Rochester, New York-based auto care company where customers can save money by avoiding going to the dealership or a mechanic. The company’s reach extends from Maine, to South Carolina, to Missouri. Its market cap is $1.39 billion.
As its largest new holding, Daruma purchased 1,337,997 shares of Monro in the second quarter when the stock price averaged $44. This holding has a 3.1% space in the portfolio, and shares have returned to near the second quarter’s average price, though they approached 52-week highs in June and July.
Monro’s first quarter of 2014 ended in June 29, 2013. Sales of the quarter surged 21.9% year over year to $206.2 million. The increase came mainly sales at its new and newly acquired stores, while comparable store sales trends of the first quarter weakened. Earnings increased 16.6% to $13.6 million, and earnings per share increased 16.7% to $0.42, at the low end of the company’s expected range of $0.42 to $0.46.
Customers at Monro in the second quarter were increasingly shopping at Monro for maintenance needs as comparable oil change traffic increased 2%, but were postponing higher cost maintenance, leaving sales in other key areas flat or slightly positive. To combat the trend, the company had previously made acquisitions that outperformed their expectations, increased market share and posted strong sales and earnings increases.
In the earnings release, the company announced it would acquire 10 Curry’s Auto Service stores located in Washington D.C., which have annual sales of around $18 million. It expected the deal would close in mid-August 2013.
Below is Monro’s revenue and earnings history:
The company has a P/E of 32.4, P/B of 3.7 and P/S of 1.89.
Carrizo Oil & Gas (NASDAQ:CRZO) is an oil and gas exploration and development company based in Houston, Texas. It operates in the Eagle Ford Shale in South Texas, the Marcellus Shale in Pennsylvania, the Niobrara Formation in Colorado, the Barnett Shale in North Texas and the Utica Shale in Ohio. The company has a $1.4 billion market cap.
Daruma bought 1,787,317 shares of the company in the second quarter when the price averaged $26 per share, making it 2.5% of the portfolio. Shares have already jumped 31% since.
In the second quarter, Carrizo set several company records: oil production, total production, revenue and EBITDA. Year over year, oil production increased 54% to 11.75 Bbls/d, total production increased 7% to 28.19 Boe/d, oil revenue increased 21% to $105.8 million, EBITDA increased 48% to $102.7 million.
Production at the company exceeded the high end of its expectations as performance was strong across its primary areas of activity. Higher-than-forecast non-operated production contributed as well.
A shift in strategy also precipitated the results. The company has eased its production of gas and NGLs and increased its emphasis on oil production, while selling off assets.
Carizzo’s long-term revenue and earnings history:
The company’s P/E stands at 17.1, P/B at 2 and P/S at 3.1.
Texas Capital Bancshares (NASDAQ:TCBI) is a financial holding company whose principal subsidiary is Texas Capital Bank, National Association. The commercial bank caters to Texas businesses, particularly middle-market commercial businesses, professionals and entrepreneurs. Its market cap is $2.07 billion.
The company’s second quarter included a sequential net income decrease of 27% and year-over-year decrease of 19%, with heavy charges for organizational change. Demand deposits, however, increased 45% and total deposits increased 20%, year over year.
The bank’s return on average common equity fell to 9.94%, after achieving 18.08% in the second quarter of 2012. Its net interest income grew to $101.2 million from $90.6, while non-performing assets continued to shrink.
The company’s revenue and earnings history is below:
It has a P/E of 16, P/B of 2.1 and P/S of 4.24.
Volcano Corp. (NASDAQ:VOLC) makes devices used in endovascular procedures and vascular and structural heart disease diagnosis, and an array of other heart-related products and services. It has a $1.17 billion market cap.
Daruma purchased 2,424,563 shares of Volcano Corporation in the second quarter when the price averaged $19. This equals 2.1% of the portfolio. Its price has increased 13% from the average second quarter price.
In its second quarter, Volcano’s revenue total was $101.3 million, after a 6% increase from the previous-year quarter, with a 7% medical segment revenue increase. It also reported a net loss of $2.4 million, or $0.04 per share, after a slight gain the previous year. In the first half of 2013 versus the same period last year, revenues have grown to $194.6 million versus $185.7 million.
The company is particularly excited about increases in its Fractional Flow Reserve (FFR), disposable business, which jumped 25%, led by growth in Europe and Japan. Market share gains also continue in its Instant Wave-Free Ratio (iFR) FFR technology. The product was launched in Europe recently and in Japan during the quarter. As of the end of the quarter, the company is still expecting top-line growth for the year, though it nudged down the range in the first quarter due primarily to the impact of foreign currency exchange rates and to a lesser extent lower PCI volume, along with a GAAP net loss.
Volcano’s revenue and earnings history is below:
The company currently has a P/E of 255, P/B of 2.9 and P/S of 3.03.
To see more of Mariko Gordon’s stock trades, visit her portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Mariko Gordon.
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