Investment Master "hand in hand" teaches you how to select stocks.
Wall Street's famous fund manager: Small-cap stocks also have a big world!
Whitney George's investment experience and philosophy
Many big investors focus on value investing, but value investment strategies that focus on small-cap stocks are rare! The famous American investment fund manager, W. Whitney George (W. Whitney George), has a great say in this regard.
Whitney received a bachelor's degree in history from Trinity College, but his career has been linked to financial investments.
He has worked for several well-known securities and management companies, including Dominick & Dominick, Inc. (Dominick & Dominick, Inc.) , Oppenheimer & Co. (Oppenheimer & Co.), etc.
The company he stayed with the longest was Royce & Associates (Royce & Associates), where he worked for 23 years! Among them, he served as the company's co-chief investment officer from 2009 to 2013. During her tenure, Whitney managed or supervised several funds, and played a very important role in the company becoming the leading small-cap management company in the US!
What kind of investment philosophy and investment results does Whitney, who has very rich investment experience?
He has long insisted on value investing and favors small-cap stocks. He was personally named the “Best Fund Manager” for American small-cap funds by Financial Intelligence Monthly in 2011. What are the specific results?
For example, the George's Low-Price Stock Fund (George's Low-Price Stock), which he previously managed, had an average annual return of more than 10% in the previous 10 years, and the market return during this period was close to zero; it was also the Royce Low-Price Stock Fund (Royce Low-Price Stock Fund) that he previously managed. As of July 2001, the fund's average annual return rates for five, three years, and one year reached 20.19%, respectively, which greatly beat the S&P 500 Index and Russell 2000 index.
Today's Whitney is Sprott Inc. (Sprott Inc.) CEO of, and also serves as a senior portfolio manager for Sprott Asset Management USA (Sprott Asset Management USA) and Sprott Focus Trust (Sprott Focus Trust). In his first 15 years of operating Sprot Focus Trust, the company's net annualized yield was 11.2%, and the Russell 3000 Index's annualized growth rate during the same period was 9.7%.
There is something in common between his investment philosophy and his career philosophy. Like he said, “I love situations where an unpopular industry leader turns adversity into an advantage.”
Whitney George's Stock Selection Strategy
So what kind of stock selection strategy does this fund manager, who favors small-cap stocks, have? It can be summarized in the following points.
1. The market capitalization is less than $3 billion.
According to Whitney, there is also a “big world” in small-cap stocks, but these stocks are easily overlooked by investors. In addition to looking at small-cap stocks from the perspective of market capitalization, another dimension is stock prices. Whitney prefers to invest in stocks with a stock price of less than $25.
2. When the PE price-earnings ratio is low, the net price-earnings ratio PB and price-sales ratio PS are also lower.
Valuation is also a point that Whitney values very much. What he is always looking for is a “bargain” with a transaction price lower than the estimated value of the enterprise.
Briefly about these three indicators, they are the most commonly used valuation indicators. Among them, price-earnings ratio = total market capitalization/net profit, net market ratio = total market capitalization/net assets, price-sales ratio = total market capitalization/total revenue.
Their scope of application is different. Companies with stable profits are often valued using price-earnings ratios. Cyclical stocks use net price-earnings ratios more often, while market-sales ratios are mostly used for companies with a low loss or profit base and rapid revenue growth. Whitney here is more concerned with PE, PB, and PS as auxiliary indicators.
In terms of specific values, with the exception of companies whose performance is growing very fast, it is generally reasonable to have a price-earnings ratio of less than 20. However, when it comes to net market ratio, it is generally considered more reasonable to be less than 1. Of course, this is just a general statement; specific values should be viewed flexibly according to different industries and companies.
3. Good balance sheet situation and holding large amounts of cash while not in debt.
Whitney felt that a key factor in investing was a good balance sheet. At the same time, if the company has enough cash, the company's management can have time to resolve the problems that have caused the stock price to plummet.
4. At least for the past 3-5 years, the return on total assets and return on capital have remained high and stable.
Let me roughly explain these two indicators.
Return on assets (ROA, returns on assets) is a comprehensive profit indicator. ROA = net profit/total assets, which measures the company's ability to use all assets to generate profits. Generally speaking, levels above 10% are excellent.
Return on capital (ROC, return on capital) = profit after tax/total capital. It measures the company's profitability and potential to create value compared to the amount of capital invested by shareholders and other debt holders. Generally speaking, the higher the return on capital, the more efficiently the company uses capital.
Overall, Whitney's stock selection strategy takes into account the three aspects of stock style, valuation level, and the company's operating conditions. Through these standards, he hopes to find small companies with good balance sheets, high returns, and although not currently favored, they are expected to double their stock prices in the future.
How do we apply this strategy?
Although the small-cap strategy sounds a bit risky, and not all market styles are suitable for getting started with small-cap stocks, how can these standards be quantified if you use this strategy at the right time?
Market capitalization: This is very direct; it can be directly implemented as a “market capitalization <300 million US dollars”.
Valuation: If 3 indicators are considered at the same time, they can be considered based on valuation scores and valuation industry rankings. For example, it has maintained a valuation score of < 50% for almost 3 years, and the industry ranking is within 50.
Good balance sheet situation: Here, you can consider the balance ratio (total debt/total assets), which is an indicator reflecting the company's level of leverage and overall solvency. It is generally believed that a balance ratio of < 50% is excellent.
Holding large amounts of cash: This can be done by looking at the company's free cash flow to see if it is greater than the market average. This is more difficult to quantify in more detail.
Return on total assets ROA: Continuously looking at the level for 3-5 years. This is difficult to achieve during the initial screening stage. Then, let's first see if ROA> 10% has been met in the last year, and then further screening will be carried out later.
Return on capital ROC: There is no common explanation for the specific value of this indicator, so you can see if this indicator is higher than the market average.
What else can be done in specific practical terms?
After we get here, we can take US stocks as an example and use a bull-bull stock selector to practice.
The 4th and 6th indicators above cannot be accurately filtered for the time being, so let's use indicators 1, 2, 3, and 5 first.
At this point, we have initially selected 44 stocks (data taken from November 20, 2023). If you're interested in Whitney George's strategy, you can further analyze these individual stocks.
For example, further consider free cash flow and capital return ratio ROC, which were not covered in the initial screening, to see if the total return on assets ROA and ROC return on capital have been high and stable in recent years, or to see what industries and topics these companies belong to, or conduct some further fundamental, technical, and financial analysis of them.
Of course, Whitney George's strategy shared today doesn't guarantee that it will fit the current market or be profitable, but I hope it will inspire you.
